The COVID-19 outbreak is causing uncertainty around the world. Organizations are facing or have faced already significant challenges in their supply chain network. In the current world of global economy and international trade a delay or non-performance of one supplier may cause a chain reaction effect on the whole supply chain network, triggering a wave of claims, delay notices, Force Majeure notices, contract suspensions or even terminations.
As companies navigate through the crisis it is important to consider mechanisms and processes to recover losses incurred and to protect themselves from potential claims.
Below are 5 practical steps which will help you to be prepared and well organized for the potential future claims and financial losses
Step 1: Perform contractual diagnostics
- Review the specific contract terms that may give rise to a claim or potential issue (FM clause, Extraordinary events, etc.)
- Review the contracts to identify potential problems. These can be for e.g. cross-border contracts, contracts under foreign law, contracts with Force Majeure clauses etc.
- Understand the requirements to make a potential claim or time limit when such claims or requests for compensation can be made.
- Review procedural requirements for both parties to make a claim.
As pointed out above, the relevant clauses that cover extraordinary events may vary between individual contracts. In addition, there may be a vast number of contracts that need to be analyzed. Rather than performing a manual review, it is worth considering the use of forensic IT-Tools to support the contractual analysis. Such tools are based on artificial intelligence and efficiently support the process of identifying the relevant contract clauses and make them available for further legal assessment.
Step 2: Record relevant cost
- From the contractual diagnostics (mentioned earlier) identify the costs that you can potentially claim from your supplier, or that you can be confronted with by your customer.
- These costs may include actual costs incurred, lost profit, obligation to reimburse a counterparty etc.
Step 3: Document relation to COVID-19
- Review the status of the contract before COVID-19 and assess the potential impact of the pandemic.
- Verify if all of the delays and disruptions or other negative impacts can be attributed to COVID-19 or if the contract was in delay (distress) before that.
- Review causation requirements, if these are stated in the contract. Compile the evidence, that is required to support the connection to COVID-19.
Step 4: Establish claim management process
- Set up an internal process so that the information required to prove the loss is stored in one place and you do not have to search for it once needed. It is better to have more data and documents then less, but all of it should be relevant.
- Develop and share approach, governance process and principle with the focus on ensuring a consistent approach with the same suppliers.
- Issue an internal guidance how to process with the claims reviews. This can be a decision tree with Accept/Reject/Negotiate options.
Step 5: Prepare/respond to claims
- Make a request for compensation in a timely manner, within the time limit specified under the applicable contract, policy or regulation.
- Identify the documents, required to justify the costs and causation.
- Start collecting evidence.
- Document appropriately steps taken to mitigate the effects of the potential crisis and their evolution as the crisis develops, such as: seeking to reduce wages and other fixed costs, finding alternative suppliers, negotiating deferrals, transfer of employees to another job etc.
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