How can the logistics industry manage the risks of litigation?

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The threat of disruption to supply chains is a major concern for all logistics businesses, especially as that threat has increased and diversified in recent times.

For instance, extreme weather events are becoming more common and are causing more severe damage; cyber-attacks are now more sophisticated, more frequent and more targeted than ever before; and groups such as climate change protesters have been targeting the logistics sector seeking to disrupt services and supply chains to highlight their cause.

Not only is the impact of disruption often significant in the short-term – the Heathrow substation fire earlier this year, for example, is expected to have resulted in a loss of tens of millions of pounds – but there is also a very real possibility of litigation in the aftermath.

Indeed, given the interconnected nature of modern supply chains, disruption at a logistics hub such as a port, rail freight terminal, or airport, can have a substantial knock-on effect. As a result, logistics businesses that are unprepared for disruption will find themselves not only subject to criticism, but also potentially having to fund significant payouts. But there are steps that can be taken to manage those risks.

Protective measures

Logistics hubs must have a robust operational plan in place. This should factor-in scheduled maintenance work as well as regular checks on key systems and infrastructure to ensure these remain in good working order. Documenting this work as it is done will help defend against potential claims of mismanagement or negligence.

Logistics businesses should also work closely with sub-contractors to ensure any products and services provided are of the requisite quality and again, regular ad hoc checks of the quality of goods and services should take place. This process should also involve a regular review of procurement policies and test if they are fit for purpose.

Another essential measure is to have a detailed and comprehensive emergency response plan as well as a business continuity plan. These plans should not only be reviewed and updated regularly but also tested via practice drills. To help ensure these plans are executed properly, a core crisis team that spans various competencies (including senior management, operations, engineering, IT, PR, risk, compliance and legal) should be put in place.

Further, logistics hubs should carry out risk assessments and threat modelling covering the most critical systems, and they should isolate these key systems from each other wherever possible to help contain disruption. Staff must also be trained to adequate levels – particularly when it comes to IT systems which can be particularly vulnerable.

The power of documentation

In the event of legal action from those further down the supply chain, a paper trail is crucial. This should include not only a detailed record of all maintenance work and training, but also proper documentation of what decisions were made and why.

Any contracts entered into should also be scrutinised carefully, with particular regard paid to force majeure, material adverse change, and limitation of liability clauses. If appropriately drafted, these clauses may allow the affected business to avoid or at least significantly limit liability.

Similar attention should be paid to insurance policies. Exemption provisions should be carefully assessed in order to ensure they do not unduly limit the protection provided by the insurance and that these comply in full with all relevant legislation and regulation.

Pre-empting problems

Without being able to see into the future, no logistics business will be able to predict every extraordinary event that results in disruption. However, that does not mean that there are no pre-emptive steps that can be taken to prepare for, or even avert, possible disruption. For instance, in the UK, a number of airports obtained High Court injunctions preventing demonstrators from trespassing on the airport’s private property. This sort of pre-emptive action can help to limit potential exposure to litigation.

Ultimately, while the risks of disruption can never be entirely discounted, by taking appropriate steps the risks, both of disruption to the supply chain and of litigation in the fallout, can be mitigated. The key is to prepare properly for how such events will be dealt with, and by continuously assessing, maintaining, and monitoring key systems, while also ensuring that a record of these efforts has been kept.

Although this will not necessarily deter the threat of legal action following a disruptive incident, it will ensure that the affected business is in the best possible position to deal with the challenges caused by disruption.

This is a guest post by Helen Biggin, partner at Vedder Price