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Competition, supply chains and act of God clauses – First considerations for GCs in their Covid-19 responses

Businesses have shown remarkable resilience through an era defined by increasingly rapid change. Innovation, diversity and agility have driven adaptability and resilience. But now such resilience is facing a far more severe test in the shape of the coronavirus pandemic sweeping through societies and economies. Yet well-led businesses identify themes and opportunities emerging even from this crisis.

General counsel have the challenge of juggling (i) strategy – working with their boards on strategy and performance; (ii) legal issues and regulatory change; and (iii) team leadership and delivery (who, what, where, how). Identifying a framework and common themes can help decision-making.

One common theme of recent years and the current climate is protectionism. Globalisation and free market flows have shown remarkable resilience to Trump, trade-wars, Brexit and a global surge in populism. Yet the coronavirus is likely to have a far more dramatic impact with a tightening of who and what crosses borders.

Emerging from the crisis quickly and with a robust competitive position will need a clear vision for the future that is more agile, technologically advanced and, more profoundly, operated more ‘locally’ while maintaining a global view.

We are a couple of weeks into the protectionist measures already introduced by individual nations and the EU. Examples include:

  •  changes in foreign investment regimes such as that in Spain designed to shield its markets and Spanish companies becoming targets for foreign investors;
  •  trade restrictions – the European Commission prohibiting unlicensed export of certain personal protective equipment;
  •  last month’s Commission guidance calling on member states to screen FDI on strategic companies coupled with a reminder of other measures including public and health security grounds and the possibility of taking ‘golden shares’ that give controlling stakes.

Force majeure and managing your supply chain

The primary challenge for major companies is the lack of resilience of just-in-time business models. Short-term emergencies may have been factored into contractual arrangements but not severe curtailment. Businesses need to avoid knee-jerk reactions and be aware of wider implications of force majeure clauses such as the extra hurdles some jurisdictions impose for relief and the need to show causation and mitigation.

In some areas a more collaborative approach to supply chains is emerging, for example among the UK supermarket chains (supported by the relaxation of competition rules by the UK Government) and among automotive original equipment manufacturers.

Suppliers are considering retrenchment, reassessing business models and consolidating in key markets while cutting loose underperformers. Losing underperformers can alleviate cash out-flows but will invariably have consequences, possibly leading to the insolvency of the company closing; the need to fund to maintain supply; ransom requests or acquiring the business to maintain supply.

Whereas single point-of-failure assessments previously focused on organisations, it is likely we will see a geographic and regional assessment also needed. All these factors may lead to a near-shoring of supply.


Businesses are considering short-term needs. We are seeing a large number of clients:

  • requesting waivers for actual and anticipated covenant breaches;
  • drawing down available and seeking to extend facilities. Banks are being pragmatic and supportive, especially where the request is limited to breaches easily identified as a consequence of the virus. Businesses with the experience of managing through the 2008/09 crisis will appreciate the need for good relationships and communications;
  • considering market fundraisings;
  • looking to government financial support such as the Covid Corporate Financing Facility.

A focus on tighter cash management is likely to lead to a focus on core assets and ‘keeping the home fires burning’.

A fit for future legal team

We have seen client legal teams under huge strain. What may have been a luxury or important, but not urgent, has been forced. Measures such as remote and agile working, the use of technology in the widest sense, a critical assessment of shape, function, process, priorities and productivity have all been tested.

Initial responses were necessarily on protecting people and mobilising to agile working to safeguard our teams and their wellbeing while working remotely. But this will be a catalyst for furthering strategic objectives. The quantum leap to this new way of working will help drive progress with diversity, teamwork, resilience and sustainability. The status quo has been challenged.

The current crisis is a huge challenge to us all as we act to protect our businesses in an increasingly protectionist world. If we keep our focus and think strategically, our businesses and our legal teams can emerge stronger, better and fit for the future.

Keri Rees, partner and co-head of corporate and commercial at Eversheds Sutherland

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