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  • April 16, 2020

    Hello COVID-19, You Broke My Supply Chain – Now What?

    As the health care industry grapples with the rapid spread of the COVID-19 pandemic, interruptions from the industry’s key suppliers are inevitable. Peggy Barlett discusses certain considerations that the industry should be proactively thinking about as the interruptions in the supply chains impact daily operations and patient care within the industry.

    Peggy L. Barlett

    By now, the novel coronavirus and COVID-19 has impacted everyone’s jobs, families, and daily lives as we learn how to operate in the new environment and timeline set by COVID-19.

    Health care supply chains are vital in supporting the daily operations of any health care organization. With the global COVID-19 pandemic, supply chains are being disrupted, resulting in shortages of personal protective equipment (PPE), ventilators, and other medical equipment. As health care systems, providers, and workers (collectively, Providers) are flooded with COVID-19 patients, maintaining necessary supplies and materials is becoming more and more difficult.

    Analyzing Gaps

    As the disruption continues, Providers will need to analyze the gaps in their supply chains to identify immediate actions and prolonged actions that must be taken to alleviate such gaps.

    This means that certain considerations must be evaluated, including:

    • the supplier relationship;

    • the importance of the good or service at issue;

    • how one disrupted supplier impacts all the other suppliers in the chain;

    • contractual obligations, specifically force majeure and other enforceability rights and options; and

    • how insurance may come into play for operations impacted by the supplier interruptions.

    Many in the legal industry would likely argue that the supplier contracts are a primary focus. This might be true if the Providers weren’t experiencing interruptions in several supplier deliverables. However, it seems more likely that the Providers are focused on triaging the relationships and working with suppliers to identify how best to handle the interruptions.

    Peggy Barlett Peggy L. Barlett, U.W. 2009, is special counsel in Husch Blackwell’s health care, life sciences, and education industry team in Madison, where she concentrates her practice on health care commercial contracting and contract management.

    Essentially, the Providers don’t have time to focus on what the contract says about performance and what remedies are available. It’s not unusual for these supplier relationships to have a lengthy historical context, filled with years of negotiations, renewals, resolving day-to-day performance issues as they arise without acknowledging or touching the contract.

    With vital PPE and other materials being delayed, Providers likely are, and should continue, to evaluate the supplier relationships to identify ways to remedy and/or limit the disruptions.

    Likewise, Providers need to analyze which suppliers are a priority and how the disruption impacts the chain of suppliers. For example, if one component is provided by a nonperforming supplier and that component is necessary for a separate component from second supplier in the chain, the ripple effect continues.

    This risk analysis allows the Providers to identify actionable next steps to address the disruptions, focusing on the most significant based on the business needs. While this may sound simple and transparent, if Providers haven’t previously completed this type of analysis and now have to do it for their entire supply chain, it can be intimidating and overwhelming and require many resources to make it happen.

    Once Providers complete this risk analysis and identify which priorities to address, then what?

    It’s time to determine what the contract says regarding supply chain disruptions. Contracts usually have a variety of performance expectations, such as specifications and quality control, quantities, warranties, etc.

    Force Majeure Provisions

    However, the most talked-about provision right now is seemingly force majeure. Why? Because everyone is trying to figure out where COVID-19 fits into the typical force majeure provision.

    Force majeure provisions generally address what happens when certain events outside of either party’s control prevent any party from performing its obligations under the contract. Essentially, the parties use force majeure to allocate risk associated with such events.

    The provision itself can be as detailed as the parties negotiate but may address the following:

    • nonexhaustive list of events that qualify as force majeure;

    • a statement that either party’s performance will be excused upon the occurrence of a force majeure event;

    • any notice requirements of the party exercising its rights under the provision;

    • any mitigation efforts; and

    • what rights, if any, the party impacted by the nonperformance may have (g., can that party obtain goods/services from another supplier if the event is not resolved in a timely manner).

    When There Is No Force Majeure

    Believe it or not, there are still some contracts/terms that do not address force majeure. In that instance and if the parties disagree, a court would likely decide whether a party is excused from its performance obligations while the force majeure event is active.

    Section 2-615(a) of the Uniform Commercial Code excuses a party’s performance regarding delivery/nondelivery, where such performance is impracticable due to the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made, or by compliance in good faith with any applicable foreign or domestic governmental regulation or order, whether or not it later proves to be invalid.

    Does COVID-19 Qualify?

    Providers now find themselves in a situation where several rarely expect to be: reviewing the force majeure provision to confirm if COVID-19 qualifies, and if so, what options are available.

    Is pandemic or epidemic listed as a force majeure event, and if not, could it potentially fall into another category (e.g., government order/shutdown, act of God)? After evaluating the impact of the supplier disruption, does the Provider allow the supplier time to remedy the disruption? If so, how long? Should the Provider find another supplier or avenue through which to receive the necessary equipment?

    Finally, as the pandemic continues, for what could be quite some time, does the Provider pursue legal action? If they decide to go all in and pursue legal action, will the courts decide in favor of the Provider given the severity and global impact of COVID-19?

    All of these questions are driven by the business needs and the relationships discussed earlier, all while trying to maintain patient care, stay healthy, and slow the spread.

    Insurance Coverage Considerations

    Finally, many Providers may be asking what insurance coverage(s) are available to help cover the costs and losses resulting from these supply chain interruptions.

    Some insurance policies may include business interruption coverage. However, business interruption coverage is often limited to direct physical loss sustained by the policy holder.

    One thing is certain: COVID-19’s impact on Providers’ supply chain changes daily, as does the landscape in which Providers are currently providing patient care. Like the rest of the world, I will be staying tuned.

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    Health Law Section Blog is published by the State Bar of Wisconsin; blog posts are written by section members. To contribute to this blog, contact Kristen Nelson and review Author Submission Guidelines. Learn more about the Health Law Section or become a member.

    Disclaimer: Views presented in blog posts are those of the blog post authors, not necessarily those of the Section or the State Bar of Wisconsin. Due to the rapidly changing nature of law and our reliance on information provided by outside sources, the State Bar of Wisconsin makes no warranty or guarantee concerning the accuracy or completeness of this content.

    © 2023 State Bar of Wisconsin, P.O. Box 7158, Madison, WI 53707-7158.

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