Supply chain dynamics in a Covid-19 world

The Covid-19 pandemic has caused severe disruption to local, regional and international supply chain processes in the primary sector industry. Canterbury has not been immune from these impacts and where business was once conducted on a hand-shake, Covid-19 has left a lot of businesses scrambling for continuity in the supply of products and services.  It comes as no surprise then that there has been a strong shift by business owners to focus on protecting their supply chain by upgrading and improving the terms and conditions of their supply arrangements.

Formal supply agreements are becoming the order of the day to mitigate against disruptions as well as to enhance the overall value of the business.  In times of scarcity, interruption and uncertainty, the importance of entering into considered and well prepared supply agreements has become essential.

From a purchaser’s perspective, certain fundamental terms should be recorded to ensure that the services are delivered to an acceptable standard.  These service standards include timing of delivery, adherence to bio-security procedures (where applicable) and to grade / quality and volume of products to be delivered.

The purchaser should identify the circumstances under which a variation of the service standards may apply and provide direction to the supplier in regards to the rectification of non-complying services.

Considering the current trading environment, non-compliance with services may occur more often than not and it is in the purchaser’s interests to be able to have the right to appoint an alternative supplier if and to the extent that the first supplier is unable to meet its contractual obligations. The purchaser should be entitled to appoint a third party supplier and any costs associated with this appointment should be passed on to the supplier of the first instance.  Further protections may be secured from the purchaser including warranties and indemnities (where the supplier will indemnify the purchaser against any claims, expenses, losses, damages or other costs incurred by the purchaser as a result of non-conformance by the purchaser with the service standards).

Where a supplier provides products and services on a regular basis, it will also be important for the purchaser to be able to verify accounts. The purchaser may find discrepancies or irregularities in various tax invoices that are presented for payment.  In this instance, it is important to have a flexible and nimble dispute resolution process built into the supply agreement which allows the purchaser to verify accounts and where appropriate and in the interests of the purchaser, to apply set-off of various accounts or tax invoices. Too often, parties unnecessarily burden their relationship with arduous dispute resolution mechanisms which are not conducive to a speedy resolution.

The purchaser should also retain rights in regards to termination of the supply agreement where the supplier fails to meet its obligations and where appropriate, to build into the supply agreement, assistance following termination which allows the purchaser to retain some continuity whilst it sources an alternative supplier.

A comprehensive supply agreement should also consider health and safety compliance and ensure that the supplier has the necessary insurance required to cover the activities contemplated in the supply agreement.

At the end of the day, effective supply agreements should accord, as far as possible, with the practical performance aspects of the contract whilst accommodating legal protections for non-conformance.