5 Questions You Should Be Asking About Your Global Operations Right Now
Kegler Brown Global Business News March 19, 2020
Now that the World Health Organization (WHO) has declared COVID-19 a global pandemic, U.S. companies have been taking critical strategic steps to secure their international supply chains. And because of the related financial, labor and travel disruptions, managing overseas operations and business units is posing an increasingly more difficult challenge.
It is frankly difficult to quantify the economic loss that could occur because of this outbreak. However, US companies involved in international transactions, and/or having global operations should consider the following key issues, and ascertain tools to mitigate any damage and losses that may occur.
1. How will COVID-19 affect my global supplier contracts and agreements?
That depends on the agreement, of course.
for the Sale of Goods
Most international agreements for the sale of goods may be governed by the UN Convention on the International Sale of Goods (CISG), which will likely protect your international suppliers from having to contractually perform if they’ve been affected by COVID-19. In participating “contracting states” (including the U.S., China, India, European Union countries, and many more), Article 79 of the CISG shields a business from liability for failure to perform if that failure was due to an “impediment beyond its control” that could not have been foreseen, overcome or avoided. This Article typically applies to international agreements if the agreement is (a) for the sale of goods, (b) the parties are in different “contracting states,” and (c) the agreement doesn’t expressly state that CISG will not apply.
for the Sale of Services + Non-Goods
If your agreements are not covered by CISG (agreements for services, for example), you’ll need to have your lawyer examine whether the local laws of the non-performing entity recognize the “impossibility of performance” concept. Many common law countries (including the U.K., India, Canada and Australia) recognize that so-called force majeure events are a matter of the contractual language. Civil law countries (including the UAE, Germany, China and France) typically excuse performance, pursuant to their codified laws, due to a “change in circumstance.”
A number of countries, including India, have taken the position that COVID-19 is at least a “force majeure” event with respect to government procurement, so the writing may already be on the wall.
The bottom line is that your international suppliers likely are protected in failing to fulfill their obligations because of the pandemic. So now is the perfect time to review your international contracts with your lawyer and work together to update your form agreements to make sure they include favorable language for instances like these.
2. I’ve lost control over my international supply chain- what do I do?
Global production has either been significantly delayed or canceled and those effects are rippling throughout the international operations of businesses everywhere, yielding frustration and desperation for business owners.
But an agile strategy can help you re-orient your operations and feel more secure in your global partnerships. There are 4 key strategies to consider pursuing to help repair a broken supply chain:
- Create a risk matrix for your suppliers. By identifying which of your partners belong in high-and low-risk categories, you’ll develop a clearer path for alternative decision-making if the situation calls for it.
- Explore alternative suppliers. It may be feasible still to find effective partners in different jurisdictions where production may be easier to access during the pandemic, but be sure to have a lawyer review your contracts to identify exclusivity provisions or minimum purchase requirements that could create a breach of contract.
- Consider in-sourcing your production. The make/buy decision is always a complicated one, but in the short-term, it might make sense to localize your manufacturing operations. You’ll need to do an assessment of whether you have access to the equipment, materials, technology, and intellectual property to allow this as an option.
- Prepare for foreign insolvency issues. Thinking proactively about your strategy for potential supplier bankruptcies can save headaches down the road. Recovering what you view as your own materials and equipment may require your involvement in a protracted court case abroad at a time when urgency is paramount.
3. How do my global privacy obligations factor into my thinking in this environment?
Because of your global footprint (either through subsidiaries or other corporate presences), you ideally have an acute awareness already of the many global data privacy regulations that apply to your operation. Many countries, including the U.K., China, Australia and India, have additional regulations governing the collection and processing of what is referred to as “Sensitive Personal Data,” which would be akin to HIPAA regulations in the U.S. and includes certain medical information.
Many companies are collecting an increasing amount of this medical information from their employees to help them make workforce decisions. This may include data related to (a) the physical condition of an employee (i.e. body temperature measurements), (b) medical records and histories, and (c) physical screening reports.
Regardless of the pandemic, businesses must operate in strict accordance with privacy regulations in every jurisdiction where they have a corporate presence.
We have been working regularly with companies to perform a basic audit of their global operations to outline the privacy and data protection laws to which they are subject in those jurisdictions in order to comply with the myriad regulations that may apply throughout their geographic footprint.
4. What kind of relief is being offered by other countries that might benefit my local operations there?
Much like the U.S., governments worldwide are taking serious action to provide relief to businesses and workers severely affected by the COVID-19 crisis. These actions vary, of course, but largely fall into several key categories that U.S. business need to be aware of.
As one example, Italy has enacted a 60-day moratorium on every employers’ ability to terminate employment contracts for any issues related to COVID-19. Other countries have mandated paid leave for workers who must self-quarantine, which also includes a back-door subsidy for their employees to facilitate it. In general, workforce protection has and will remain a key goal of international governments, which may limit choices that might otherwise be made by the employers.
Many industrialized countries where U.S business maintain operations, including the U.K., Germany, South Korea, Canada and Australia, have announced sweeping economic policies designed to rejuvenate the local economies. In most cases, these ideas center on lowering interest rates and providing cash grants and long-term low-interest loans to small businesses and non-profits.
U.S. based businesses should be working with professionals to evaluate whether they are eligible to access these benefits as soon as possible.
5. How do I preserve my cash flow in foreign jurisdictions to fund operations?
Right now, most businesses have one thing at the front of their collective minds- optimizing and preserving cash flow to survive the pandemic. White it can sometimes be challenging to have a firm grasp of your comprehensive financial standing throughout your entire global operations, there are three critical concepts that U.S. businesses should understand in order to remain afloat.
- Take stock of your financial instruments. In cross-border trade, many payments are made through letters of credit, bank guarantees, and other notes, which are often as good as cash, depending on the jurisdiction. So, maintain an inventory of your payment methods and financial instruments worldwide.
- Gain a clear understanding of your drawing ability. Typically, governments or financial institutions will put conditions on your ability to draw on lines of credit or otherwise access capital to build cash. Creating an effective matrix that outlines those conditions, credit limits and other important financial information is critical.
- Communicate with your suppliers. Business owners should always be in touch with their partners and have their pulse on the economic capabilities that exist on the ground locally. If your suppliers or partners become insolvent and can’t meet your product demand or invoke a “force majeure” clause in your contract to cease production, then your upstream sales will be damaged and your cash position weakened. Communication goes a long way in avoiding these surprises.
Clearly, COVID-19 is going to create a temporary setback in the world economy, so it is important that companies with a global footprint remain prepared for the impending challenges and work closely with legal counsel to maintain an understanding of their rights and obligations under their insurance policies, commercial agreements, and applicable foreign laws.
If you need guidance on the issues outlined in this article or would like to discuss your global strategy more generally in light of the COVID-19 global health crisis, please contact Vinita Mehra directly.