The outbreak and spread of Covid-19 (“Coronavirus”) has already had a considerable global impact. According to the World Health Organisation’s latest situation report, over 90,000 cases have been reported across 72 countries, including China, Iran, South Korea, Singapore, Italy, Spain, France and the UK, amongst other countries. The situation is still developing and is being followed worldwide with great interest and obvious concern.
Governments have responded to the outbreak with various measures, including implementing quarantines, locking-down entire cities and towns, and restricting travel both within and across their borders. Some organisations have taken steps to implement their own measures to try and limit or prevent the spread of the virus amongst their workforce, including by temporarily closing offices, restricting employee travel and requiring those returning from certain countries to self-quarantine and work from home. As a result, it is inevitable that the performance of services under some commercial contracts and outsourcing agreements will suffer from interruptions and delays. Similarly, the timely delivery of some goods may be at risk.
In this article, we summarise some practical steps that organisations can take now to mitigate, or be better prepared to mitigate, the impact on their business of disruption to the performance of services by key suppliers as a result of Coronavirus, including options that may be available under the applicable services and other supply agreements.
1. Identify services that could be affected, or that you may need to place increased reliance on
Although it may be difficult to predict the exact consequences that the outbreak of Coronavirus may have on commercial arrangements, organisations should identify their key resources, supply and services arrangements and consider whether and how those could be affected.
When considering this, things to think about include:
- whether goods are stored in, distributed or delivered from, to or through a location that has been affected or is subject to any restrictions on travel arrangements;
- whether goods are required to transit through an affected location or through a country that has implemented any controls or restrictions on movement within or across its borders;
- any planned or anticipated need for significant meetings, conferences or other concentrations of people which may lead to an increased risk of infection;
- the location of relevant employees and individual contractors of both the customer and the supplier. For example, outsourced IT services may involve the provision of remote-access IT support by supplier service-desk personnel in off-shore locations;
- the travel arrangements for key employees and individual contractors (of both the customer and the supplier) and whether this requires travel to an affected location or through a country that has implemented any controls or restrictions on travel; and
- whether the unavailability of particular ‘hard to replace’ or strategically important individuals (whether or not designated as “key personnel”) could potentially have a significantly more disruptive effect.
Organisations should consider whether they have appropriate governance procedures in place for these key arrangements, including:
- who is responsible for reviewing and monitoring risks and Government and other available guidance;
- how risks will be reported upon and escalated, if it is necessary for some action to be taken;
- internal business continuity and resilience plans; and
- internal communications plans.
2. Review relevant agreements
Once the relevant key suppliers and services arrangements have been identified, the agreements for these should be reviewed to see what contractual rights may be available to both the customer and the supplier. The review should focus on:
a. Force majeure and material adverse change
The terms of any force majeure or material adverse change (“MAC”) provisions in the agreement and whether those would excuse one or all parties from performance of, or allow them to suspend the performance of, or terminate, their contractual obligations. Key to that analysis will be whether or not the impact of the outbreak constitutes a force majeure event or MAC, as defined by the agreement. If it looks as though the force majeure or MAC provisions could apply, you should familiarise yourself with the notice and other requirements of that provision to ensure that any relief sought by a party under the force majeure or MAC clause is done so in accordance with the contract. Further discussion of force majeure can be found in Coronavirus and Force Majeure.
b. Supply chain and subcontracting associated risks
In addition to considering how the performance by a supplier may be affected, thought should also be given to the impact on the wider supply chain, including the subcontracting arrangements that may have been agreed with the supplier. Do you have transparency of material subcontracting? If not, you will likely need that visibility to be able to assess and take steps to mitigate any associated risks.If those supply chains and subcontracting arrangements are impacted, what effect could that have on the supplier’s delivery of goods and/or services? The subcontracting provisions of relevant commercial contracts and outsourcing agreements should be reviewed, for example, to:
- check what information and audit rights the customer has in relation to any sub-contracting;
- check what rights a customer may have to withdraw its consent to the use of a particular subcontractor or require that subcontractor’s removal or replacement; and
- check what responsibility the supplier has for the performance of a subcontractor.
c. Ramping up alternative resources and adjusting working practices
If a key supplier fails (see ‘BCDR: Update relevant contingency plans’ below), or you need to take steps to safeguard your own operations, your business continuity plan and associated infrastructure needs to be able to respond.
For example, you may need to temporarily close one or more business premises.If you do, will your and your suppliers’ IT infrastructure be able to respond to the increase in remote working as employees and contractors need to stay at home? Do your employees take their laptops home each evening?If not, and you need to close the location they primarily work at suddenly, how will they access your systems and continue to work?
Or you may need to notify customers of changes in practices or other impacts to the services they receive.If you do, how will that be communicated, and will you be able to handle any consequential increase in customer enquiries?
Consider your options for dual or multi-sourcing goods from suppliers based in alternative locations and territories in order to mitigate or reduce the impact that Coronavirus may have on your supply chain. This will include looking carefully at contractual provisions in affected arrangements to see what ability you may have to flex up or down, in particular on short to medium term notice. Once you have identified where goods are stored, distributed/delivered from and applicable transport routes (and whether goods are stored in, distributed/delivered from or moved through an affected location or through a country that has implemented any controls or restrictions on movement within or across its borders), consider whether you can switch distribution hubs and/or adjust the way that they are used, in order to move concentration away from affected areas, and what alternative transport routes and options may be available. Ask your suppliers what plans they have in place to work around these issues.
Identifying resources and suppliers you may need to lean more heavily on, checking the sufficiency of your contractual arrangements with those key suppliers (and taking steps to address or mitigate any potential shortfall), and discussing contingency measures with the relevant teams and suppliers, will put you in a better position to respond.
d. Engage in dialogue with suppliers
Use the governance/relationship management framework under relevant agreements to engage in dialogue with the relevant suppliers (and if none, reach out to the relevant suppliers in any event).Those conversations should seek among other things to:
- find out more about whether they have been or anticipate being affected by the outbreak;
- in relation to personnel and individual contractors engaged by them (and particularly those that work closely with the customer, or in a team that works closely with the customer), identify whether they are following self-quarantine and other guidance as regards such individuals returning from visits to at-risk locations, or otherwise having been involved in circumstances involving an increased risk of exposure to the virus;
- identify what business continuity planning they have in place and whether or not it has been reviewed and updated in the context of this new threat; and
- establish what steps they have taken to mitigate the possible impact on their performance of the services, what impact there might be on their subcontractors and supply chain and how that is being mitigated, and to begin jointly discussing a congruent approach to avoiding, preparing for, and mitigating the effects of, any disruption.
e. Request information and seek transparency
Review what contractual rights you have under relevant agreements to request and access information from their suppliers. For example, key commercial contracts and outsourcing agreements will often include terms that allow a customer to request or access information about the supplier’s performance of (and capability to perform) the services (including rights to conduct audits). Hopefully, through the governance framework, the parties can take an open and collaborative approach to providing information about, and taking steps seeking to minimise, the risk of disruption to either business, and their preparations for any disruption, to ensure achievement of improved and seamless end to end resilience.In some cases, suppliers may already have communicated the measures that they are taking to prepare themselves and to mitigate potential risks.
f. BCDR: Update relevant contingency plans
Material commercial contracts or outsourcing agreements are likely to require the supplier to maintain an exit plan, and a business continuity and disaster recovery (“BCDR”) plan that can be invoked upon certain types of significant events occurring. To manage operational risk, it may be necessary to terminate or scale back an arrangement and exit it in whole or in part, or to invoke the BCDR plan. When doing so, the customer needs to have confidence the relevant plan is fit for purpose. Accordingly, customers should check that they have seen and approved the latest versions of those plans and that they have been recently reviewed, tested and updated – and if they have not, take steps to ensure that they are promptly revised to reflect the services and associated risks, and are otherwise adequate.
g. Monitor service performance
Pay close attention to the supplier’s performance against service levels and key performance indicators (“KPIs”) and look for signs of a drop-off in personnel continuity or availability, or service degradation or failure. Customers should check what contractual rights they have to receive reports from a supplier of their performance against the service levels and KPIs and should ensure that those are being received when due and with the level of detail required.If such reports indicate (or the customer otherwise perceives) a degradation in performance, that should be escalated with the supplier quickly and you should consider what other options may be available under the contract to mitigate potential risks (and secure further information as may be necessary).
h. If performance has degraded, consider available options
If a supplier’s performance of services has been adversely affected, you should consider what options you may have under your relevant contracts to work around the disruption, for example:
BCDR – consider: (1) whether the supplier should have invoked its BCDR plan in accordance with the applicable contractual terms and, if so, make enquiries as to whether this has been done and request regular updates; and (2) your own BCDR plans and procedures and whether these are sufficient for the anticipated disruptions and risks on yout organisation following the outbreak of Coronavirus.
Living wills – Significant outsourcing agreements (particularly those in the public services sector) may also include a requirement to maintain a ‘living will’. A living will is a contingency plan that describes all of the information necessary to ensure that, when the contract ends, whether as a natural expiry or planned early termination, or an unexpected or unwanted early end, the customer (and/or one or more replacement suppliers) can take over seamlessly to ensure that the customer’s business operations suffer minimal disruption and its service users are not unduly inconvenienced. If your agreement includes living will provisions, you should consider: (1) whether the living will has been kept up-to-date by the supplier in accordance with the customer’s business needs; and (2) exercising contractual rights that you may have to request a copy of the living will and check whether it is up-to-date and sufficient to enable the smooth transition of services back to you or a replacement supplier. For further information about living wills in outsourcing arrangements, please see Living Wills in Outsourcing Arrangements.
Step-in rights – review the step-in provisions (if any) contained in your applicable agreements.These rights provide a mechanism for the customer to ‘step-in’ and assume performance and/or management of the performance of the services (or to employ an alternative service provider to do so on their behalf), typically where events have occurred, or are likely to occur that will or a reasonably likely to, have a materially adverse effect on the services. The wording of each step-in provision will need to be looked at carefully to decide whether the impact of Coronavirus on a supplier’s performance meets the required threshold for triggering these rights.
Remedy plans, quality plans, sub-outsourcing – other solutions could involve the supplier drawing up and implementing customer-approved plans to get the services back on track and monitor service quality, or potentially subcontracting to a non-affected supplier.
3. Other areas to consider
Financial services – Organisations operating in the financial services sector should think about their wider regulatory obligations relating to risk management, outsourcing and operational resilience and how these may be impacted by the outbreak of Coronavirus. Operational resilience and IT outsourcing are currently high on the agenda of financial services regulators. Financial institutions need to consider whether the impact of the Coronavirus will increase their operational resilience risk – both in terms of their own personnel and resources and those of the subcontractors and supply chain they rely on. Further discussion of the current regulatory focus on operation resilience and the risks resulting from IT failures is available here and here.
Employers of UK staff – Organisations should consider the impact that the outbreak of Coronavirus may have on their employees and the issues around their duties as employers. Some key considerations for employers of UK staff can be found in Coronavirus – Key considerations for employers of UK staff.
Listed companies – There may be indirect consequences for UK listed companies, including in relation to audit, corporate governance matters and reporting requirements under the Market Abuse Regulation. For further information on the impact of Coronavirus on UK listed companies, please see Indirect consequences of Novel Coronavirus for UK listed companies.
Hotel sector – Global tourism and hotel revenues are being severely affected as a result of the Coronavirus. In addition to considering any relevant local government guidelines, hotel brands and operators would need to consider their general duties to use reasonable care to ensure that properties are both safe for hotel staff and guests. For further information on the factors to consider as a key stakeholder in the hotel sector, please see Novel coronavirus and the hotel sector.
Article co-authored by Fatima Butt.