[PODCAST] JAMS Neutrals Discuss How Businesses Can Take Preemptive Action to Address Supply Chain Challenges

In this podcast, JAMS neutrals Barbara A. Reeves, Esq., CEDS, and Katherine Hope Gurun, Esq., provide insight on the top considerations for companies impacted by constant supply chain disruption. Barbara and Katherine specifically draw on their years of experience working at JAMS and other organizations to provide helpful tips for businesses that are navigating disruptions brought on by the pandemic, climate change, the war in Ukraine and other crises, outlining how mediation and arbitration can provide a template to help resolve related disputes.

JAMS - Transcript - Supply Chains

[00:00:00] Moderator: Welcome to this podcast from JAMS. Today, we're going to be talking about some of the challenges many businesses are facing with supply chains and how to prepare for potential disputes. Two years of shutdowns from the pandemic wreaked havoc on how goods are assembled and delivered around the world, and now the war in Ukraine and sanctions against Russia are creating new challenges.

In this episode, we are joined by two JAMS neutrals with years of experience dealing with supply chain management issues at major corporations and now as mediators and arbitrators: Barbara Reeves, formerly associate general counsel and vice president for Southern California Edison and Edison International, and Katherine Hope Gurun, formerly senior vice president and general counsel at Bechtel Corporation.

Thank you both for joining us. Katherine, I'll start with you first. You have a lot of experience in risk management. What has stood out to you in terms of the challenges companies have faced since the onset of the pandemic?

[00:00:58] Katherine Hope Gurun: I think initially during COVID, companies and industries were looking for short, stopgap solutions, waiting for things to return to normal. I think, in fact, we now know that normal may never be so normal again. Many companies, however, already have begun to analyze and overhaul their supply matrix to make it more sustainable. Remember, for years we worked on a just-in-time inventory basis. We worked to cut out the middleman everywhere we could.

Now, unfortunately, we are looking to have a larger pool to deal with and to look for ways in which we can improve the supply chain and also build in redundancy. I think the challenge for all industries is not only how to get through this crisis, but how to be better prepared for the future. I can promise you that there are many first-rate companies who did not have a full understanding of their risk and protection under contracts or any other legal agreements in the event of a global pandemic, and certainly not in the event of a hot war. Everyone has been focused on keeping the business moving.

I don't think that many people have thought about what will happen over time. How will we resolve these disputes? I think we know now that in these very difficult times, industries will benefit from using ADR mechanisms, particularly mediation.

[00:02:16] Moderator: What are the benefits of using mediation to resolve some of these disputes?

[00:02:20] Katherine Hope Gurun: Mediation can be very cost-effective. It puts business leaders in the driver’s seat with the supportive legal counsel and an experienced mediator. Mediation can also bring multiple parties to the table for a better result.

[00:02:33] Moderator: Barbara, can you tell us how some of these supply chain issues have played out in real mediations?

[00:02:38] Barbara Reeves: Yes. Two years ago, when cases first started coming in that were, I thought, the usual complex commercial contract types of cases that I mediate, I didn't think anything special was happening. Gradually, I realized we were always talking about a problem, a breach of contract because somebody was in short supply of something, everything from computer chips to pharmaceuticals to athletic shoes.

As I looked at these, I realized that we had a supply chain or supply matrix disruption with common causes, and I started structuring a process for mediating these cases, business interruption cases. There are four points that I'd like to make about that. First, these cases have multiple parties. You have a buyer, a supplier, that supplier's supplier and other potential suppliers in the market who may have an interest. You may have a lender who has made a loan to somebody in this chain of supply who is now worrying about its loan and investors who are worrying about their equity in whatever company it is, or firm that is finding itself unable to perform as before.

So, the first point is you have multiple parties. Can you get them all into one room? The second point is they're usually in multiple jurisdictions, which could be international—usually is international—certainly can be in multiple states, whether it's around Europe, whether it's around the United States or in Asia.

So, you need a way to try to get people together. That doesn't work in court. It doesn't work in arbitration. So, we've been turning to mediation because the third point is you need the cooperation of the parties. When I was in-house, we had a major supply disruption, and we tried to handle that by negotiating with the different parties, and that involved suppliers. It involved a federal government agency. It involved a state government agency. And we continued to negotiate one at a time. This went on for a year. We weren't as sophisticated then—this was back in the year 2000—as we are today about mediation and how we can use it. One of the parties wouldn't cooperate, and it was very difficult to cooperate. And of course, if you've ever tried to get a governmental entity to cooperate, you know that can be difficult.

So on point three, the cooperation of parties is important. A mediator is a good intermediary, somebody who can bring the parties together by explaining. You may have an advantage in the short term by playing hardball, but step back and think, where do you want to be a year from now? When this disruption is over, the parties [will] probably want to be back doing business together again.

That goes on to point number four, which is these disputes tend to involve companies and governmental organizations that have ongoing relationships. So, while in the short term it's helpful, one party may view it as to its advantage to play hardball: Supply is short; let’s raise the prices. If it winds up putting people out of business and companies out of business, causing employees to lose jobs and disrupting business relationships, when all of this is over, people are going to regret [it]. So, a mediator is a good person who can pull them all together. In a case I had last week, we had five parties, including not only the contracting parties, but an investor, a lender and a group of consumers who were being companies who were consuming it, who were being adversely impacted.

We managed to put together not a final deal, but a term sheet that talked about how the parties over the next 30 to 60 days were going to continue to negotiate to get this resolved. When people say, “Well, why mediation?” It's because, in my opinion, a mediator, when you get someone who's done a lot of these complex commercial cases—I analogize it as looking at a maze. If you walk into a maze, you can see straight ahead a little way. You can see one opening to the left or the right, but you don't necessarily know—you have no idea which way to go. A mediator who has done dozens of these cases looks at them in the same way as if you had an aerial view of the maze. If you could go straight up above the maze and take an aerial shot of it, you can see, “Oh, that's how this could work out.” A mediator who's done a lot of these cases tends to see possible solutions and is also pretty good at talking to the parties and telling when they're bluffing and what their real interest is.

[00:07:48] Moderator: Barbara, you mentioned a supply chain matrix. Can you just explain what that is?

[00:07:53] Barbara Reeves: You know we use the phrase “supply chain,” but when you actually look at it, if you were to map out your supply chain, you would see that you buy from—you, company A, buys from multiple parties.

You have supplies coming in left, right, and front and back. Each of the companies from whom you purchase also has supplies coming in left, right, front and back, and everybody has employees, many of whom are unable to participate for a while because of geopolitical restrictions or COVID. So, if you were to draw a picture of it, it would look more like a matrix or a spider web, not a straight chain.

That is the secret, or the key, to trying to resolve these. If I can't go straight ahead with my traditional relationship, forwards and backwards, maybe I can reach out sideways or diagonally to another supplier or—as in the case that I mentioned earlier—to an investor who has a connection to another supplier or a lender who has an interest in finding a way to make this work.

If you were to draw a picture of it, you realize you have nodes that are connected by lines to many different other nodes. So, it looks like a matrix, not just a supply chain.

[00:09:15] Moderator: Katherine, what can companies do now to prepare for the next supply chain dispute?

[00:09:20] Katherine Hope Gurun: So, first of all, companies should always and continuously update their risk management policies.

Risks need to be assessed on an ongoing basis—not only allocated, but reallocated. If you look at why companies fail or why projects fail, you'll often find that underlying assumptions were inaccurate—perhaps based on old data, perhaps based on old assumptions. Remember also that the insurance market is constantly changing and you need to keep addressed with those changes. Risks which couldn't be covered by insurance 15 or 20 years ago or even five years ago can now be covered by insurance.

Secondly, it's really important for companies to establish a risk register database for all of their contractual and legal agreements so that exposures can be mitigated perhaps in advance or quickly resolved as a crisis looms. When the first Gulf War happened, the first question was, what is our exposure? What does this contract say?

To have people reassessing those on a real-time basis really slows and delays the process, and sometimes dangerously. Thirdly, I think that everyone should be—and I'm sure they are now—focusing on updating their procurement practices and documentation. Lastly, companies should not wait until they have a dispute to figure out what their dispute resolution policy or practice is going to be.

As Barbara has made clear, many of these disputes will be international, so governing law and the forum for the disputes are going to be really key to successful settlement of them.

[00:10:49] Moderator: Barbara, Katherine mentioned insurance. Can you talk a little bit about what role insurance plays in these supply disputes?

[00:10:57] Barbara Reeves: Yes. Insurance obviously is the subject of another program that could take an hour.

The points to note right now are most companies have commercial general liability—CGL—policies, which are being interpreted by the courts these days to determine whether there are exclusions or whether they apply to everything from COVID to geopolitical problems to wars. So, if you look, the question is, do you have other specialty insurance, and can you get it?

Everybody is looking at that now. There are specialty insurance policies, including contingent business interruption—referred to as CBI—policies and supply chain insurance that's available. Contingent business interruption, or CBI, [insurance] provides coverage against losses caused by disruptions at the locations of your suppliers and customers.

So, the question again is, what kind of problems, disruptions are covered? Are they only physical coverages, physical disruptions, or would it also include disruptions caused by things that governments have done, shutdowns or borders being closed? Supply chain insurance, as I've said, is now coming into vogue, and it can cover losses caused by, for example, natural disasters, labor issues, political upheaval, war, public health emergency and regulatory action.

I've seen several of these policies. I hear they may be expensive. So, you need to look into those, but it's just something to remember to check, as Katherine said, when you're looking at your risk prevention.

[00:12:38] Moderator: All right. Well, definitely another topic to pursue on another episode, but Katherine, in your many years of experience with international construction at Bechtel, can you recall instances where a supply chain approach reduced the number of actual disputes or where ADR techniques were more effective in resolving some of these disputes?

[00:12:58] Katherine Hope Gurun: Yes. I want to give you just three quick examples. The first is when Bechtel first went to China. It was [during the] very early days. The published laws of China were about three inches thick, a little, small stack for joint-venture arrangements, and the rest of all Chinese laws were confidential. So, the first thing we did is to take Bechtel’s normal approach to contracting and take it apart 100% and come up with a set of terms and conditions and important liability and risk allocation issues that could be covered in a brief contract, because in every case, we were both learning. We were learning from the Chinese. They were learning from us. Having this pre-work before we ever went to China, I think, served us extremely well.

In all of my time being in China and managing China, we only had two matters which actually went to formal dispute resolution. Simplify it if you can. Secondly, after the first Gulf War, Bechtel was very involved in the restoration of the Kuwait oil fields. In this case, we had to procure over $2 billion worth of expected material to be required for the restoration.

We didn't know when or if we would be allowed to return to Kuwait. We didn't know how difficult the job would be. So, to begin with, again, pre-work. We had some time, [so] we took apart our procurement and logistics practices completely. We stripped them back to the bare bones with an extremely small team with access to all senior management, and we rewrote and revised the entire supply and procurement practice for that job, which later went on to become a model for many future jobs.

We established strategic hubs all over the world and had a unique on-site procurement team and worked with the client, again, to establish a very unique insurance program that allowed us to do this restoration work in essentially a war setting. As a result of this pre-work, seven years of estimated time to put out the fires at $120 million a day was reduced to six months.

So, that was extremely important. I should add also that we diversified firefighting technology and looked for technology all over the world. Lastly, in the case of the Channel Tunnel Rail Link in the United Kingdom, a new practice was introduced in English law which allowed the parties to settle disputes as the project was ongoing, and this practice allowed them to craft a temporary solution.

Not everything could be known at the time. The goal was to allow for the parties to keep the project moving and, if necessary, to come back and revisit the project later. This project is called adjudication. And in fact on that project, it was extremely successful. In the case of Bechtel, I can recall only one or two significant adjudications which were not revisited, but the project moved along and came in under budget and on time. So again, a very good approach. You don't have to know everything to settle a dispute, and this is always hard for both lawyers and businesspeople to accept, but it is the truth.

[00:15:57] Barbara Reeves: I'd like to make one point. And that is, there are those of us who practice what is often called mixed-mode dispute resolution.

As a way of moving forward, decide that the mediator will turn into an arbitrator for one particular issue. There may be a contract term that needs to be interpreted. There may be a law that needs to be applied. And then the mediator mediates, then holds a brief hearing or has documents submitted, makes a ruling on one issue and then returns to mediation.

Alternatively, a matter that starts in arbitration could switch into mediation. At some point, after the parties have presented their positions, they may turn to the arbitrator and say, “We would like to mediate this issue.” It may be the entire case. It may be one claim. But if they can mediate it and then agree that if they resolve it, they'll go back to arbitration, or if they resolve that issue, they will then negotiate between themselves and settle it.

So it's called mixed mode. If you do it, you have to be careful. You have to sign the appropriate documents that confirm that the arbitrator may act as a mediator or the mediator may act as an arbitrator, and be clear about what result you want.

If you get a settlement, it may be a settlement that then gets reduced to a consent award as an arbitral award, and you want to make sure that it will be enforceable.

[00:17:29] Moderator: Let's wrap it up with a forward-looking thought. How do you envision this playing out over the next six months to a year, Barbara?

[00:17:37] Barbara Reeves: Yes. I think the only certainty is uncertainty. We thought when this started that we would be dealing with COVID for a year. Now it's going on longer, and who knows when the next outbreak is going to occur? Meanwhile, COVID has been slightly edged down the front page from the very top by the conflict in the Ukraine.

At the same time, we're seeing other countries in Europe—Finland and Sweden—applying to join NATO. We're seeing a number of changes, and we don't know what's going to happen on the geopolitical front next. The point that I've made repeatedly is when you don't know what's going to happen, be flexible. If you can't go left and you can't go right, go straight ahead. If you can't go straight ahead, be ready to go left, right or sideways, and to do that, you need flexibility.

Mediation is an answer, in my opinion, to how to have flexible dispute resolution with somebody who is a third party, an intermediary, a neutral who has experience and can guide the parties through to a long-term, successful resolution, notwithstanding the current uncertainty that we're all facing, and that we’ll continue to face, I believe, in the next six months to a year.

[00:18:53] Moderator: Okay. Being flexible is key. Katherine, what about you?

[00:18:57] Katherine Hope Gurun: I would agree with everything Barbara said, but I would just say this. I think that we can now see that the ripple effect is likely to have been greatly underestimated. The effects of the invasion by Russia of Ukraine and the Russian sanctions are going to reach every corner of the world. Food supply, already drastically impacted by climate changes, is certainly going to be far more devastating with the invasion of Ukraine and both Russia and Ukraine are major producers of wheat and other agricultural products. So, I do think that the need for real-time flexibility and both technical expertise in terms of working around a major transportation [block] and other blocks are going to be significant.

I think there's a huge role to play for real-time resolution of these projects.

[00:19:47] Moderator: Well, I know we've only scratched the surface on this very complex topic, but you've given us a lot to chew on, Katherine and Barbara. Thank you so much. You've been listening to a podcast from JAMS, the world's largest private alternative dispute resolution provider.

Our guests have been Barbara Reeves and Katherine Hope Gurun. For more information about JAMS, please visit www.jamsadr.com. Thank you for listening to this podcast from JAMS.