What’s the supply chain crisis?

Answer

Every item on a shop shelf (either online or in real life) is there because of a supply chain. The supply chain extends from the supply of raw materials to various stages of production and transportation before a product is with the end customer. Supply chains are often very long and each part of the chain is highly interdependent on the entity above it doing what it should do and on time.

If there are delays in one link of the chain, it has a domino effect on the rest. This is what’s happening all over the world, which is causing a supply chain crisis in almost all sectors.

Have you noticed recently that your local supermarket shelves have been empty? That’s likely down to the supply chain crisis. Have you had to wait an especially long time for delivery of furniture, a new piece of tech or a car? That’s also likely a result of the supply chain crisis.

While supply chain shortages are being experienced across the world, this article will focus on the situation specifically in the UK.

What’s causing the crisis?

Although there are many other contributing factors, the most recent and significant causes are considered below.

1. Covid-19

The pandemic had a catastrophic effect on supply chains for a multitude of reasons. Largely, these can be categorised into a reduction of supply, coupled with an increase in demand for goods.

As national lockdowns swept the globe, a number of businesses were forced to close. This included the agriculture sector, production and transportation companies, as well as shipping ports – all of whom are fundamental links within supply chains.

Even after lockdowns were eased, many companies faced labour shortages due to health-related absences, restrictions on numbers in the workplace and many migrant workers returning home to be with loved ones. Furthermore, companies were concerned about their finances, with many going insolvent because of the uncertain economic impacts of covid-19. All these factors led to an overall decrease in output across a wide range of industries.

At the same time, demand for goods and specifically, delivery of goods to homes, increased. covid-19 created the perfect storm in which there were problems with getting the materials and workers to make products to meet this demand and even where the goods were available and ready to be shipped, there were difficulties with getting the goods transported.

Just one example of this is the shortage of semi-conductor chips that resulted after a surge in the purchase of electronic goods. A large proportion of chips produced worldwide are made in China, where some of the most stringent restrictions remained in place for a long time, ultimately reducing the availability of chips worldwide. This caused delays in the supply of a wide range of electronic products including electric cars, laptops, mobile phones, washing machines and even some pet grooming machines.

2. Brexit

The UK's exit from the European Union (EU) has also had serious repercussions on supply chains.

Firstly, free movement of people was replaced with a points-based immigration system, in which salary thresholds and English language skills must be met before work visas are issued. This makes it more difficult to employ EU-nationals, who historically have been employed in key industries that make up supply chains such as agriculture, food manufacturing and haulage. 

In addition, although many EU nationals would likely have qualified for settled status visas (as they were already living and working in the UK), several left the country as they felt "unwelcome" after the referendum. This therefore depleted workers within the supply chain, reducing productivity.

The UK's departure from the EU also meant the removal of a single market across Europe. The result is that goods being shipped between the UK and the EU must now undergo custom and regulatory checks at the border. This increases costs and causes further delays in the supply of goods.

3. Staff shortages

Currently, vacancies in the UK are at an all-time high. A shortage of staff in any part of a supply chain is likely to create problems further down the line and ultimately lead to delays and empty shelves.

One industry that’s particularly affected by a lack of workers is haulage. Prior to the pandemic and Brexit, there was already a shortage of heavy goods vehicle (HGV) drivers. These problems have only been exacerbated by the events of recent years. This is because, historically, many HGV drivers in the UK were EU nationals and many decided to leave after Brexit, because of covid-19 or because they struggled to obtain a working visa. In addition, various lockdowns and workplace restrictions meant that the issue of new HGV licenses was interrupted during the pandemic. Therefore, even when drivers were available, they couldn’t start work.

The shortage of drivers means that, when goods are ready to be transported to their next destination – whether that’s wheat being sent to manufacturers to be made into flour, the flour going to the bakers or the final product of bread being transported to shop – there’s a delay that can ultimately leave supermarket shelves empty and customers waiting for goods.

4. Russia/Ukraine conflict

There’s a worldwide reliance on Russia for oil and gas and a number of important minerals. Both the Ukraine and Russia also export a large proportion of the world's key agricultural supplies, including sunflower oil, wheat, and barley.

Consequently, Russia's invasion of Ukraine and the subsequent sanctions against Russia has had disastrous consequences for already struggling supply chains because companies have been unable to import goods from their usual suppliers in Russia and Ukraine. It also has the potential to raise costs substantially, as companies look for new sources of the materials that it needs to operate.

The legal implications of the crisis – how is it affecting businesses?

When a supply chain is disrupted, businesses may become unable to fulfil their obligations under their contracts on time, or even at all. If someone higher up the chain is unable to supply the goods they are supposed to, this will usually affect everyone else down the supply chain.

Ultimately, if a company can’t meet its contractual obligations, there’s a risk of being sued for breach of contract. Although it’s sometimes possible to source goods from elsewhere, this will usually mean buying at a higher price, which therefore reduces profits. If profit margins are squeezed too tightly, it may no longer be financially viable for the company to operate and it may be forced to close (or go insolvent). This will then affect everyone else below them in the supply chain as each business will need to find new suppliers.

Given this interdependence, manufacturers and suppliers may choose to re-negotiate supply contracts if they’re facing issues. This helps ensure that supply chains are upheld and any decreases in profit is shared among them, ultimately enabling all businesses in the chain to survive in a difficult economic climate.  

However, not everyone is able to successfully renegotiate contracts and this can lead to an increase in claims for breach of contract. If a claim is successful, a company may be required to pay a large sum of money in damages (and potentially legal costs too). This could put their continued existence in jeopardy.

In defence of these claims, companies may try to rely on force majeure clauses. A ‘force majeure’ clause is a clause in a contract that frees parties from their obligations, either temporarily or permanently, in the event of an extraordinary happening outside of the parties' control. Covid-19 and the Ukraine War has the potential to be considered a force majeure event, as does the supply chain crisis itself. However, ultimately, the success of such a defence depends on the exact wording of the clause. Alternatively, some businesses may have insurance policies that would pay out for any successful claims against them caused by factors outside of their control.

A further issue facing businesses is an increased lack of transparency within their supply chain. This is because, when a business finds a new supplier in a desperate attempt to fulfil its contractual obligations, there’s a risk that it may be forced to use less ethical sources. This could mean using suppliers that engage in modern day slavery and practises that are damaging to the environment. This then puts the reputation of all other businesses along the chain at risk, particularly where certain environmental, social and governance (ESG) objectives are high on a business’s agenda. As such, it’s more important than ever for companies to perform their due diligence on suppliers and ensure that its supply chain remains ethical, even during these difficult times. If it doesn’t, it risks upsetting shareholders and attracting negative press which is likely to be even more detrimental to the business. 

What does the supply chain crisis mean for law firms?

Generally, when the economy becomes unstable, the type of work law firms are instructed on evolves. As a result of the supply chain crisis, law firms that deal with commercial contracts are likely to have seen an increase in contract renegotiation instructions, as well as breach of contract claims. In addition, insolvency practitioners may have seen a rise in work as the crisis creates financial instability for a large number and variety of companies across the country. A further, more remote consequence is that there may also be an increase in negligence claims against solicitors for failing to draft supply contracts in such a way that protects their client from the effects of the supply chain crisis.

Finally, a law firm is of course a business itself and it’s therefore not immune from the effects of the supply chain crisis. This is likely to include (among other things):

• issues with obtaining new IT equipment or stationery;
• increasing energy and other costs which reduces profits; and
• difficulty in ensuring an ethical supply chain thereby hindering the meeting of any ESG objectives.

There are also likely to be problems with collecting revenue from corporate clients if they’re facing financial difficulties or go insolvent. This will affect law firm's own cash flow which could in turn put them in financial difficulty.

Therefore, law firms, just like other businesses, will need to find a way to weather the storm of the supply chain crisis. As is often the case, however, challenging market conditions for clients will require commercial and tailored legal advice to help those clients navigate their way through the tough market conditions. So while the type of work and advice required from law firms is likely to change as the economy falters, the need for high-quality, pragmatic legal advice will remain as important as ever.

Ella Ennos-Dann is a trainee solicitor at RPC.