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Supply chain risk: How to avoid disaster

Sourcing cheap products abroad is commonplace across many industries but it is not always clear where liability lies in the supply chain. In the aftermath of the collapse of the eight story factory complex in Bangladesh, businesses ponder one question: how can we monitor suppliers” compliance with health and safety laws?

The much publicised catastrophe impacted on a number of UK businesses which sourced garments from the factory. It has awakened the long debated issue as to whether the cost savings of global supply are undermined by the issue of conducting business with a supplier which is failing to protect the safety of its workers – not to forget the resultant hugely damaging publicity. 

Perhaps the first consideration when looking at liabilities is how they are addressed in the contract. If your own terms govern the arrangement, you have control over where risk is apportioned. Where you seek to contract on your standard terms but the supplier also has standard written terms of business, the general rule is that the last set of terms to be supplied before the contract is deemed to have been entered into will be the governing terms. To avoid this potential lottery, a purchaser should seek to negotiate individually agreed terms in the form of a master supply agreement, governing all supplies from that supplier.

You should consider what provisions you wish to include to address health and safety issues. A simple statement requiring the supplier to comply with applicable health and safety laws may not be good enough from an ethical and PR perspective, especially when dealing with overseas suppliers whose health and safety laws may be limited. Your contracts and the way you police them may need to be much more hands-on.

Businesses should:

  1. Consider conducting appropriate due diligence on the supplier, including factory visits, assessing health and safety issues and compliance with good practices; perhaps using third party assessors;
  2. Consider introducing an ethical policy outlining your health and safety requirements;
  3. Check contracts contain clear and enforceable requirements as to compliance with health and safety obligations and good practice;
  4. Ensure applicable standards are imposed throughout every part of the supply chain. For example, if sub-contracting is permitted, that the same health and safety obligations are applied to each sub-contractor;
  5. Closely monitor the continued performance of their suppliers through regular factory visits; allowing yourself the right to carry out inspections and testing (without notice) within the supply contract;
  6. Ensure their suppliers are properly insured to meet claims for breaches in health and safety obligations;
  7. Ensure termination rights are reserved in the agreement where standards are not met;
  8. Put in place a plan for bringing the operations back in house or sourcing an alternative provider in the event of termination;
  9. Reserve the right to consolidate/join proceedings (especially if there is an arbitration clause in any contracts in the chain); and
  10. Ensure there is a choice of law and jurisdiction clause in the main agreement and that this applies down the chain.

Liabilities and bad publicity can be avoided by taking greater responsibility, carrying out appropriate due diligence and having in place a well drafted supply agreement coupled with an awareness as to the contract processes amongst those sourcing the materials or services in question. The key to ensuring the safety of the workers in your supply chain is to be fully aware of what is going on at the premises of your suppliers and to have and use the right to withdraw from the arrangement if the supplier does not meet your standards. 

Fiona Moss is a solicitor at Mundays LLP.


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