As the 2019 Novel Coronavirus (COVID-19) continues to spread across the world, the challenges for companies operating in the industrials, manufacturing & transportation (IMT) sector are increasing. Companies across all industry sub-sectors from aviation, mobility, transportation and logistics, to industrial conglomerates, chemicals & plastics, agribusiness, and construction are facing a number of significant business and legal issues. Here is a checklist of emerging risks and possible solutions aimed at helping IMT companies navigate the rapidly evolving situation.
The aviation subsector has been impacted more significantly than any other IMT subsector. Plummeting demand due to government lockdowns, travel restrictions, constricted business travel, and general passenger concerns has had myriad consequences for airlines and aviation-related businesses. Moreover, the issues for aviation have both cause and effect roles for virtually every other sector of the global economy. Noteworthy impacts of COVID-19 to this subsector include:
- Reduced revenue and significant financial stress, with airline insolvencies likely due to the outbreak.
- Hiring freezes and workforce reductions.
- Uncertainty over airport slot allocations and usage requirements; some jurisdictions and airports have temporarily waived these rules that require an airline to maintain a certain level of operations, but there is inconsistency globally, and this relief may need to be extended.
- Compensation and other obligations to passengers for flight cancellations and disruption, such as under European Union Regulation 261.
- Decrease in orders and deliveries for aircraft OEMs, which will in turn impact parts manufacturers.
- Reduced airfreight capacity due to fewer passenger flights, causing supply chain and logistics disruption with repercussions beyond the aviation industry.
- Potential nationalization scenarios, state aid legislation, bailouts, and other government intervention for airlines.
IMT companies have some of the most complex supply chains of any sector and thus are particularly hard hit by quarantines, travel restrictions, and other disruptions caused by the COVID-19 outbreak. Further, the IMT sector also includes companies that provide the transportation and services necessary for an effective supply chain, such as airfreight, rail, shipping, and logistics. Significant issues IMT companies are wrestling with include the following:
- IMT companies source from and have operations in multiple jurisdictions and, due to the global nature of the COVID-19 outbreak, may have difficulty reacting to and minimizing supply chain impacts. Actions to close borders and restrict movements affect not only people, but also transportation of goods, both between and within countries. Companies will experience delays and shortages, making it difficult to resume and maintain operations even after the virus has waned in some countries.
- Complex supply chains make it more difficult to identify where the "pinch" points are, in particular given the dynamic nature of the impacts of COVID-19 as it moves across the globe. To get ahead of this impact, IMT companies will need to continually update their supply chain risk assessment with new information.
- Changing manufacturing locations or suppliers quickly raises additional risks, especially because of time constraints on properly vetting such supply chain shifts to ensure technical product compliance. Risks include sourcing from regions with slave or child labor, additional customs and import/export compliance, increased risk of liability for bribery and improper influence such as under the U.S. Foreign Corrupt Practices Act (FCPA), and other issues with disreputable parties and unreliable operations.
Steps to alleviate pressure on supply chains include:
- Conduct a full risk assessment on the impact of the outbreak on business activities.
- Evaluate options when core supply chains are disrupted.
- Consider whether there are alternative ways of performing the contractual obligations.
- Consider whether there are ways of mitigating the effects.
- If entering into new contracts, draft provisions clearly and comprehensively to cover eventualities such as the present outbreak, and understand implications of the law governing the contract.
- Consider the possibility of invoking force majeure clauses (see below for further considerations).
- Monitor the announcement of any new governmental or regulatory policies.
The COVID-19 outbreak raises challenging issues for employers. Aspects to focus on from an employer's point of view include:
- Maintain a safe working place, whilst at the same time maintain volume and standard of operations.
- Present a considered and consistent approach to paying employees affected by COVID-19 or who are being quarantined; explore applicable state aids, short time working possibilities, or compulsory vacation/unpaid leave.
- Minimize exposure to liabilities:
- Protect the health and safety of employees (in particular vulnerable employees such as those with disabilities or caring responsibilities for vulnerable relatives);
- Protect the health and safety of vendors, customers and persons liaising with the company; and
- Protect employees affected by travel bans or who have been quarantined abroad.
- Review applicable government health alerts, track travel and health restrictions.
- Maintain communication with employees.
- Facilitate remote working where possible.
Given the unexpected nature of the COVID-19 outbreak and its impact on a wide range of business operations, parties to commercial contracts are considering the prospect that affected parties may invoke force majeure ("FM") or equivalent remedies in order to excuse delay or non-performance. This impact is particularly relevant in the IMT sector, which relies on a complex network of transportation, logistics, distribution and sales parties to source raw materials, manufacture equipment and products, and get them to market and ultimately the end consumer. Considerations for contracts that are or may be affected by the outbreak include:
- Review each contract carefully, with particular regard to statutory provisions of the law governing the respective contract and FM provisions, including any time bars or other procedural requirements.
- Form a preliminary view on whether any FM provision is "open" or exhaustive in relation to the list of FM events and whether the outbreak and/or resulting government crisis measures are covered or excluded. Also consider the validity of force majeure claims made by counterparties.
- If there is a need to invoke a claim, consider any potential obligation to mitigate the effect on non-performance and what steps should be taken. Starting a mindful dialogue with the counterparty may be an important part of the process.
- Consider any potential flow on effects from the invoking of a claim such as termination of the contract.
- Explore other remedies that may be available, such as contract frustration or the doctrine of changed circumstances.
Aside from a party's legal position, there are several other important matters of concern:
- For a counterparty who receives a FM or similar claim they do not think is valid, there is the issue of enforcement of the contract, particularly if it does not provide for international arbitration.
- There are the reputational risks and potential damage to long-term supply relationships with key buyers and suppliers. Even where there is no legal basis for FM or similar relief, parties who receive FM claims may wish to be flexible about amending or restructuring (e.g. by postponing deliveries) the contract to accommodate the affected party.
- Declaring FM or receiving a FM or similar claim may impact insurance arrangements (see below).
- Buyers who are part of a chain of supply contracts may themselves need to declare FM in response to a supplier's declaration in order to avoid being in breach. Each contract in the chain may of course be on different terms or subject to entirely different governing laws and this can create substantial challenges for the buyer, especially where their downstream contract has less favorable (or no) FM provisions. There may also be separate time bars or other procedural requirements.
- If entering into new contracts during this period, consider the FM provisions and provisions applicable under the governing law of the contract with particular care.
The impact of COVID-19 on business continuity, supply chains and travel needs may lead to significant losses. It is important to assess and understand whether these losses may be covered by insurance policies. Companies should:
- Determine whether the insurance policies provide the right types and levels of coverage for crisis situations and are responsive to any changes in the business.
- Understand the losses they are seeking to guard against (e.g. pandemics). Determine whether these losses are covered.
- Assess the impact of force majeure on insurance arrangements.
Antitrust & Competition
In the course of taking steps to protect against COVID-19 related risks, IMT companies should continue commercially independent behavior, in a manner that remains in full compliance with applicable antitrust laws. Antitrust authorities across the globe are already targeting commercial behavior triggered by the COVID-19 outbreak. Areas to avoid in the context of exchanging information, or even aligning, with competitors include:
- changes in pricing of raw materials, components, and other manufacturing inputs or services.
- changes to commercial policies in response to the COVID-19 outbreak, e.g. changes to or waivers of cancellation policies and booking modifications, changes to loyalty programs, price promotions/discounts for specific products, etc.
- changes to employment terms (e.g. salary freezes, compulsory unpaid leave periods, etc.).
- measures to reduce capacity/maintain prices for products for which demand has slumped ("crisis cartels").
- limitation of supplies to customers/price hikes for products where demand exceeds available supplies.
- terms and conditions as well as case handling by insurance companies.
- excessive alignment and concerted practices around R&D cooperation projects to address the current crisis.
More generally, competition authorities across the globe, are working from home, or have closed down. Some authorities, such as the European Commission, have ceased to accept merger control notifications, which will lead to a build-up of delayed filings. IMT companies should factor this in their transaction planning.
Many IMT businesses will experience disruption in their ability to delivery services and products to customers as well as reduced customer demand for those services and products, and should consider measures to maintain and protect customer relationships.
- Protect the health and safety of customers in vehicles, aircraft, or other customer premises by adopting recommended hygiene practices and communicating those practices with customers.
- Monitor government health alerts and restrictions as they may apply to customer premises and ensure compliance.
- Ensure all customer communications show empathy. Communications and responses to customer social media commentary can impact customer loyalty and endure long after the containment of an outbreak.
- Maintain customer loyalty: review existing loyalty programs, and consider amending cancellation policies and offering more flexible terms.