Global supply chains: understanding and managing key legal risks

Posted: 01/05/2016 - 00:22

As supply chains become increasingly complex, identifying the legal risks inherent in managing such a widely dispersed network of suppliers, manufacturers and other trading partners is key to spotting issues and being able to solve them as soon as possible. Global supply chains come under threat from a wide range of risks including natural disasters, financial crisis, strikes, and, perhaps a most prominent concern of late, cybercrime and terrorism.

Global supply chains also expose organisations to increased regulatory risk both in the UK and elsewhere. Take as example the Bribery Act 2010 which recently saw the first Deferred Prosecution Agreement or DPA, being entered into by the Serious Fraud Office with Standard Bank (now known as ICBC Standard Bank) relating to payments made, down the chain, by its Tanzanian affiliate to a local partner in Tanzania. This DPA, which was approved by Lord Justice Leveson in the Royal Courts of Justice at the end of last month, sees the bank pay some $25.2 million in fines, a further $7 million in compensation to the Government of Tanzania, and £330,000 for the SFO’s costs.

Law-makers are increasingly looking at not just the organisation itself but at its supply chains. The Modern Slavery Act 2015, for example, requires increased transparency by companies with a global turnover of £36 million or more who carry on business in the UK. The Act requires the publication of an annual statement setting out steps taken to ensure that slavery and human trafficking is not taking place in their business which includes supply chains. Whilst currently there are no fines or penalties for such a statement, the Secretary of State can bring civil proceedings in the High Court to require an organisation to comply with the disclosure requirement.

How then can businesses best manage the risks of a global supply chain? Supply chains typically comprise a large number of actors across widespread functions including sourcing, manufacturing, logistics and distribution, meaning that there is an increased need to focus on managing and mitigating the associated risks. However, a survey published by the University of Tennessee’s Global Supply Chain Institute in June 2014  found that 90% of firms surveyed did not quantify risk when outsourcing production and that, whilst 66% did have legal and/or compliance risk managers, supply chain risk was virtually ignored.

From a contracting perspective, a wide range of commercial agreements, such as long-term supply, distribution, outsourcing, contract manufacture and standard form agreements, are used at various interaction points between different supply chain actors.  Starting with their highest value and most strategically important contracts, businesses should evaluate their exposure in the event of the interruption of a key supply.  Where a business subcontracts in order to deliver services or products to a customer higher up the chain, a failure of one of its suppliers can put it in contractual breach with its customer with the risk of a damages claim for losses incurred, liquidated damages or service credits. Commercial contracts often contain clauses which provide relief for events outside a party’s reasonable control (e.g. force majeure) but care needs to be taken to ensure that the actual wording reflects the agreed balance of delivery risk in unforeseen and unavoidable circumstances.  These clauses can be buried at the back with other standard looking terms and conditions but should not be overlooked. Insurance contracts should also be regularly reviewed from a supply chain risk perspective.

Companies should also work closely with their insurers and brokers who will willingly share best practices – practices which must be operationalised on a day-to-day basis if they are to be effective mitigants of stress points in the supply chain. For example, where a customer identifies that is has a dependency on a small number of key suppliers, mitigating actions can include regular monitoring of these suppliers for early signs of financial stress which might lead to insolvency, increased relationship management and governance, and development of a multi-sourcing strategy.

As we saw with the tragic collapse of the Rana Plaza garment factory in Bangladesh in 2013, which caused significant loss of life, getting caught up in a supply chain disaster can have a negative impactor for your brand, with some 20 or so well-known brands including Walmart, Primark, Benetton, Monsoon and Mango all affected by that disaster.  Companies’ risk and legal functions increasingly need to devote time and effort developing policies and programs to help manage and mitigate, across the supply chain, compliance with diverse laws and regulations. The risk to reputation cannot be understated.


About The Author

Tim Wright's picture

Tim Wright is a partner in Pillsbury Law’s Global Sourcing practice.