With the continued uncertainty in geopolitics, an increased focus on environmental, social and governance (ESG) concerns and priorities, and the aftereffects of the pandemic, there has been a massive shift in the traditional supply chain across all industries. The food supply chain is under particular scrutiny to ensure products are delivered in good time and good order. As a result, many companies in the food sector have been driven to reassess their supply sources.
There are numerous legal issues that arise from supply-chain shifts:
How can food manufacturers be certain that products will be delivered on schedule?
How can producers achieve consistency amid high staff turnover and insufficient training?
What can be done when a transporter increases prices with little or no notice because of increasing fuel costs?
How can producers deal with crop devastation due to climate crises?
How can food supply be secured when there is insecurity in the global geopolitical landscape?
How can fair and equitable labour practices be assured throughout the supply chain?
Historically, contracts have included clauses relating to liability, indemnification and force majeure (act of God) to protect both the supplier and the customer. However, because these clauses apply only once a problem has arisen, they may not be sufficient to cover the potential pitfalls raised by supply-chain precarity, new legislative requirements and customer demands.
Businesses that seek to secure their supply chain should be proactive in planning their business continuity, evaluating their dependencies and blind spots, and developing innovative strategies for managing access to the supplies they need, including considering environmentally and socially responsible suppliers. More and more businesses are seeking to act as partners in the supply chain to optimize outcomes through flexibility, risk-sharing and solving issues that arise in real time.
From a contractual perspective, some less-reactive clauses can be considered to achieve more certainty in supply chains.
It is essential to not only develop strong and transparent relationships with suppliers, but also diversify them. As geopolitical and environmental shifts continue to disrupt the global supply chain, reliance on products from a single source, region or country may not be prudent. Businesses should move away from exclusive arrangements and mandatory minimum purchase clauses in their supply contracts. Instead, they should favour clauses that allow them to diversify their sources in the event a specific supplier is not able to meet a particular demand or purchasing a product from a specific supplier is financially untenable.
As an example of the importance of such strategies, we are heading into the third year of a global shortage of coffee, driven largely by climate change affecting crops in Brazil and Columbia. Coffee roasters and distributers in Canada that rely solely on coffee from these two countries may struggle to meet demand, whereas those that source from multiple locations will be better protected from such events.
Flexible and innovative clauses can also be integrated into contracts to address any potential breaches that might occur as a result of problems encountered in the supply chain. These clauses can take the form of risk-sharing provisions.
For example, when a geopolitical event or climate catastrophe occurs, the supplier and the customer could share the increase in cost for supplying a particular good. If a supplier is experiencing a labour shortage and the timeline to deliver the products must be extended, the supplier and the customer could similarly share the cost of any penalties imposed throughout the supply chain, or the costs can be absorbed by the ultimate customer (the person or group that uses or consumes the product). Another example could be an agreement between the parties to oversupply to ensure sufficient stock, with the parties sharing the cost of any excess storage fees.
Such risk-sharing provisions can take the form of a schedule that includes a “Plan B” or other alternative scenarios if an issue arises with “Plan A.”
Another increasingly significant consideration when drafting contracts is to incorporate clauses that address the importance of a competent and ethical labour source. With the recent passing of Bill S-211, An Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff, companies will be legally required to evaluate and report the ethical actions of their suppliers and will be held accountable for failure to meet certain obligations. This is particularly true with respect to suppliers that use forced or child labour.
Specifically, businesses will be required through annual reports to identify where risks of forced or child labour exist along their supply chain and set out the steps they have taken to manage these risks.
Businesses will also be required to not only do their due diligence in assessing suppliers and producers, but also include clauses in their commercial contracts that specifically address the quality of their labour force along the chain of production.
Checkpoints and Communication Channels
Businesses can build and maintain strong relationships with suppliers if their contracts include provisions for regular checkpoints, milestones and communication channels in order to advise of any current or foreseeable issues in the supply chain. These provisions create processes that allow businesses to proactively plan whether they need to make alternative arrangements, such as shifting product offerings or seeking other supply sources for key goods.
Businesses around the globe are also steadily being required to implement ESG initiatives to respond to larger societal pressures. As an example, reshoring or choosing suppliers that are closer to the point of sale may be more expensive in the short term but can have powerful long-term benefits such as mitigating the effects of climate change and supply chain transport disruptions. In addition, customers and other stakeholders can view socially and environmentally conscious businesses as responsible and ultimately reward them.
All in all, businesses in the food sector must remain alert to the massive changes occurring both locally and globally that will impact their supply chain. While grappling with these shifts is unavoidable, carefully and creatively drafting commercial contracts can help mitigate risks and increase access to essential resources.