Managing Legal Aspects of the Implications of a Hurricane on the Supply Chain
Much of the southern United States faces months—if not years—of cleanup and reconstruction following Hurricanes Harvey and Irma. As transportation providers begin to recover from the immediate disruption and delays caused by the hurricanes, the greater domino effect of the hurricanes on supply chains will begin to appear.
Early data shows that most supply managers believe that Hurricane Harvey, which caused widespread destruction in south Texas and the closure of the Port of Houston, will impact supply chains in coming months. The Institute for Supply Management (ISM) recently released the results of a special survey to assess how Hurricane Harvey impacted six key metrics. ISM’s survey found that the majority of responding supply managers believe input materials pricing will be somewhat negatively impacted and the majority of respondents believe supplier deliveries will be at least somewhat negatively impacted over the next three months.
Often, supply chain and procurement executives and managers will be able to work collaboratively with other supply chain partners that have been similarly impacted by the storms to reach amicable resolution of delays and disruptions that follow a hurricane. For example, as a matter of good business and goodwill, a supply chain partner may be willing to overlook delays or adjust the cost of materials to offset the impact of the supply chain disruption. Still, it is imperative to give early and critical thought to the potential lasting effects of a hurricane on an organization’s supply chain so that the organization can effectively communicate with its supply chain partners, utilize insurance coverage and address potential contract concerns.
First, as most supply chain and procurement executives and managers have already experienced, communicating early and often to supply chain partners can help alleviate the impact of storms on the supply chain. Such communications foster transparency and can help businesses on the providing and receiving sides to better prioritize tasks that must be completed (such as the shipment of particular goods) in the wake of such extensive supply chain disruption. Effective communication should help enable effective collaboration.
Next, it is important that an organization consider the potential reach of the consequences of a hurricane so that the organization can review all of its available insurance coverage to determine whether any coverage may be available. For example, if an organization experiences long and costly supply chain delays, such as shortages of raw materials, that ultimately impact its ability to adequately and timely manufacture goods, the organization will want to consider the availability of insurance coverage. Then, the insured will need to carefully review its policy to understand what is covered and what is not.
In addition to considering the coverage available, the organization will need to ensure that it manages its operations in a manner that mitigates damages since acting to protect and preserve property from loss or damage, or mitigation of damages, may be required under an applicable policy. As a review of the effects of a hurricane continues, and an insured considers potentially available insurance coverage, it will also be crucial to understand notice requirements and calendar applicable deadlines.
In the days following Hurricane Harvey (and now, likely, in the days following Hurricane Irma), many businesses have received notices of force majeure from supply chain partners. Like all supply chain contracting matters, whether and to what extent a business disruption that constitutes force majeure for an upstream or downstream supply chain partner will most likely depend upon the underlying contract. For example, if a transportation provider that was to pick up raw materials from the Port of Houston could not pick up such materials because the port was closed and the provider’s fleet was damaged, such provider would likely be able to assert force majeure to excuse at least some performance, or all performance for some period of time, in its contracts with its customers. However, the transportation provider’s customers would not necessarily be able to assert force majeure under their contracts with their customers, unless the definition of force majeure is broad enough to include a range of events beyond such party’s reasonable control.
Following past large scale natural disasters, force majeure provisions have moved from traditional contract boilerplate—with little review or negotiation—to key provisions that are thought out, negotiated and thoroughly documented. However, such attention on force majeure provisions is only recent, meaning that many supply chain contracts are likely to address force majeure in only a cursory manner (if at all). In other circumstances, parties may lack any contract and rely upon purchase orders or other short forms of documentation. In such circumstances, it is possible that applicable laws may provide some help to affected parties, but it will be important for impacted organizations to carefully consider disruptions following hurricanes to explore all possibilities.
Ultimately, the nature and scope of supply chain interruptions following Hurricanes Harvey and Irma are highly dependent upon a large number of factors, including how quickly impacted supply chain partners are able to recover their operations. Still, assembling a team that can plan for potential consequences—rather than react after the fact—is likely to benefit affected organizations and permit them to maximize strategies that will lessen the impact of the hurricanes on their businesses.
Finally, Hurricanes Harvey and Irma will serve to strengthen supply chain relationships and documentation moving forward, as businesses both recover and build new ways to respond to widespread and far-reaching disruptions.
Suzie Trigg is a partner in the Dallas office of international corporate law firm Haynes and Boone.
