The media is replete with stories about empty shelves in grocery stores and warehouses, with water, wipes and toilet paper ranking among the items least likely to stay in the stores. Many industry suppliers of non-perishable or processed foods have seen sales skyrocket as consumers are filling their cupboards with shelf-stable foods; supply chains are being stretched to ramp up production to meet demand. At the other end of the spectrum, retail food establishments and restaurants are challenged by a shortage of food supplies, customers and employees.
Prepared foods in local supermarkets present particular challenges. While salad bars, pasta stations and the like may be protected by a “sneeze guard,” these usually feature tongs or serving spoons used throughout the day by customers. The coronavirus can be easily spread through contact with these utensils, creating an immediate health risk.
Major food producers such as Coca-Cola and Campbell’s Soup source supplies in China. Even if the amounts of ingredients sourced from China are small, companies need to find alternate sources for sweeteners and other ingredients in order to meet production quotas. Other companies are looking for domestic sources for ingredients. Likewise, major food producers such as McCormick have closed (albeit temporarily) their factories in China, especially those located in Wuhan. At some point, the supply of available product will dwindle if the factories cannot reopen.
The problem, though, is not limited to food imported to the United States. Many food products are exported to China. Agricultural groups in the United States have noted that meat shipments to China have been curtailed due to coronavirus. As a result, excess product is causing port backups and taxing already-full storage facilities. Companies need to find new facilities where meats and other products may be stored in a temperature-appropriate environment to prevent spoilage.
Likewise, significant consumption drops have been reported by alcohol drink makers in countries ranging from Japan, Thailand, South Korea and Italy, which will translate into large amounts of lost sales and an accompanying negative financial impact.
Most recently, the Food and Drug Administration, Centers for Disease Control and Prevention, and World Health Organization have all highlighted the lack of evidence that the coronavirus can be transmitted through food packaging, or even food itself. In addition to following Current Good Manufacturing Practices and their accompanying hazard analysis plans, food manufacturers should ensure that each participant in the supply chain does so as well.
But maintaining vigilant adherence to these FDA requirements may prove challenging. As a result of the U.S. State Department’s Travel Advisory to avoid unnecessary travel to China, the FDA ceased conducting inspections in China, instead using other screening tools to monitor food safety. The result may be delays for products at the border and companies should expect supply chain interruptions. One way for companies to counter this is to continue to seek domestic sources of goods, and re-design their supply chain accordingly.
Purchase and supply contracts may provide a legal answer in their force majeure clauses. These clauses, which are designed to protect against loss due to a force of nature or “acts of God,” are usually situated in the boilerplate provisions at the back of a supply contract. Many of these types of provisions have general language covering “circumstances beyond the parties’ control” while not specifically contemplating viral epidemics or quarantines. Increased costs due to shortages do not usually qualify under these provisions.
These provisions can be crucial because they allow a contracting party to escape liability for contractual non-performance. Currently, however, it is not the coronavirus itself causing the supply chain disruptions. Rather, it is a combination of the virus and the fear of the virus spreading, together with government-imposed quarantines or other restrictive actions causing the problem. As a result, the language in a particular force majeure clause may not provide sufficient relief. In any event, companies at each stage in a supply chain should be reexamining their contracts with this provision in mind.
The Uniform Commercial Code also may provide relief to companies experiencing supply chain issues. A seller’s obligation to deliver goods may be excused when an unforeseen contingency renders performance impractical. These doctrines are generally applied narrowly because of their potential to interfere with commerce on a regular basis.
The current situation also raises significant employment-related concerns that can impact the supply chain. For example, many governmental entities have laws and regulations penalizing employers for changing employee schedules with little notice or sending workers home early.
Collective bargaining agreements may likewise limit a company’s flexibility in scheduling workers. At the same time, OSHA and accompanying state laws require employers to provide a safe and healthy work environment and preclude employers from placing their employees in situations likely to cause serious physical injury or death. Balancing these competing interests can certainly impact the various companies in the supply chain.
Insurance may or may not provide an answer to the financial plight of the coronavirus on the supply chain in the food industry. Business interruption insurance is the first place to look; such policies are often a part of a company’s commercial property insurance.
One significant hurdle to coverage, however, may be the policy definition of “physical loss” and whether the insured has suffered a “direct physical loss of or damage to” insured property. Courts across the country have not yet settled on a uniform rule as to when insured property has suffered a “physical loss”. These insurance issues will likely be the subject of contentious litigation in the coming months.
As the coronavirus situation continues to evolve, supply chain issues will likely become more prevalent from top to bottom. Companies need to remain vigilant in assessing their risk, while seeking to mitigate against the likelihood of significant negative risks and disruption from the coronavirus.