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Apr 2013
11
April 11, 2013

Rising Tensions in North Korea and Supply Chain Integrity

Brian T. Lang, Jeffery S. Dornbos

The unusual side story to the mounting tension on the Korean Peninsula is the risk of another global supply chain interruption. Last week, Kim Jong-un’s escalating erratic and reckless behavior reached a point where General Motor’s CEO Cliff Akerson expressed concern regarding the growing lack of stability in the Peninsula and its influence on manufacturing there. Some have even opined that North Korea’s intention in making its latest threats and moves is not to inflict physical harm on its neighbor but rather to inflict financial injury upon it. Whatever North Korea’s goals may be, the situation brings into sharp focus the importance of managing and protecting supply chain integrity.

There are many practical responses the recent drama could evoke from manufacturers with suppliers located in South Korea. Production could be increased to capacity with growing inventories quickly moved away to more stable regions of the world. Production could be spread to alternate suppliers around the globe.  Or – as GM suggested it was contemplating – production could eventually be moved away from the Peninsula altogether. Insurance is also now available to mitigate losses caused by supply chain interruption. However, all of these alternatives come at a cost and may not be desirable, practical or even permitted under existing supply agreements.

Building the right legal framework to support a supply chain is an essential element to ensuring its integrity in the face of global challenges – whether natural disaster, cyber-attack or political turmoil such as we are currently witnessing on the Korean Peninsula. No piece of the framework is more critical than supply agreements; yet, despite their importance, even when in place, supply agreements often appear to have been little more than an after-thought.

A purchase order with terms and conditions barely legible on the back is not an effective substitute for a well thought out supply agreement. Taking an active interest in the terms and conditions of a supply agreement and winning points wherever possible in negotiations can make an enormous difference down the road when supply chain disruptions are threatened or occur.

Choosing the law that applies to the interpretation of a supply agreement and disputes arising with the supplier is critical. Whatever law is ultimately settled upon, it is most important to understand the law that applies – to contemplate how the applicable law will influence and impact the resolution of supplier disputes that may be reasonably anticipated and prepare for expected outcomes. In the absence of opt-out language and an express choice of law provision and assuming your supplier is located in a jurisdiction that is a party to it, the United Nations Convention on the Contracts for the International Sale of Goods (CISG) will apply.  South Korea is a party to the CISG.  The CISG is not synonymous with the familiar Uniform Commercial Code.  

Settling upon a mechanism in a supply agreement that produces enforceable results when a supplier dispute arises is also imperative. There is no bilateral treaty or multilateral international convention in force between the U.S. and any other country regarding reciprocal recognition and enforcement of judgments from our courts. However, the U.S. and South Korea are parties to the United Nations Convention on the Recognition and. Enforcement of Foreign Arbitral Awards, also known as the New York Convention.  The New York Convention does provide for reciprocal enforcement of international arbitral awards between member states. As a consequence, international supply agreements often call for disputes to be arbitrated. The arbitral forum as well as language and location of any arbitration should be carefully considered with assistance of counsel.

Beyond the procedural and mechanical, a variety of other typical supply agreement terms can become critical when supply chains are disrupted. From the supplier’s perspective, a seller friendly force majeure provision can be a saving grace when the unexpected occurs.  However, a buyer may prefer to see the term entirely omitted, or, if not omitted, at least buyer friendly in nature and narrowly tailored to circumstances that are otherwise accounted for and accommodated by its supply chain structure. Buyers usually prefer that supply agreements ensure that risk of loss remains with the supplier as long as possible and provide for the types of damage that will be reimbursed in event of breach.  A buyer friendly termination term may also prove vital to moving on when there is a threat to supply.  Finally, relationships between your supplier and its down-stream suppliers may also be controlled to some extent by your own supply or other agreement.

Undoubtedly, most manufacturers with suppliers in South Korea will do little or nothing in response to the current threat. And, the reality is the risk to their supply is probably small.  However, no outcome is certain and there is always another threat lurking around the corner – be it natural or political. Recognizing that supply chain integrity has not usually been a priority until after a crisis emerges is the first step to making it a priority.

Warner Norcross & Judd  can help make your supply chain more resilient and assist when it is interrupted. From negotiating or re-negotiating a supply agreement, to auditing existing legal structures supporting transactions with suppliers, to representing your interests in a dispute with a supplier, Warner can help. We look forward to speaking with you regarding how we may be of service when it comes to your legal needs.

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