In mid-December 2020, the Indian subsidiary of Taiwanese contract manufacturer, Wistron downed shutters of its newest plant in the state of Karnataka after a mob of factory workers vandalised the plant. Wistron manufactures phones for Apple Inc. and was projected as an important part of building Apple Inc.’s footprint in India, and also servicing Apple’s global supply chain.
As an employer, Wistron had engaged a number of staff from third party contractors and the staff alleged that ransacking of Wistron’s manufacturing plant was instigated primarily by non-payment of wages and overtime wages, and wage cuts.
While investigations are underway, this incident has highlighted the risks faced by companies, especially those with worldwide operations and clientele, from violations attributable to suppliers and vendors, and indeed risks faced by the suppliers from down-stream vendors and contractors.
The events at Wistron’s plant have led to Wistron suspending operations, the dismissal of personnel and suspension of business by Apple Inc. This highlights the significant consequences of such events, being –
Investigation by authorities for potential violations leading to penalties and punishment for proven violations – this could also mean individual liability for the officers in-charge of the business of a company;
Business loss from suspension of business operations or cancellation of contracts;
Claims for contractual damages and penalties;
Monetary loss from damage or destruction of property;
Criminal liability or liability to compensate for death or injury; and
Loss of reputation.
Companies engaging (directly or indirectly) with third party suppliers, vendor and contractors should consider the following –
1. Due diligence of operations and compliances – Assess potential suppliers before engaging them or assess existing supplier on the following parameters –
Compliance with law (including labour law compliances);
Investigations and litigations against them;
Practices they follow; and
2. Preparing binding codes of conduct or supply chain policies – to ensure that suppliers are bound by minimum operating obligations such as compliance with law (such as equal pay and diversity, and prohibition of child labour), adhering to industry best practices and safety standards. Failure to adhere should permit the customer to invoke and apply contractual remedies.
3. Contractual remedies – Risk can be mitigated by incorporating the following into contractual arrangements with vendors –
Broad audit rights permitting independent audit of plant, premises, records, compliances and practices. Penalties should be levied for non-compliances;
Binding obligations to comply with law, submission of periodic compliance statements and indemnities for breach (which are uncapped);
Step-in rights to assume control of operations at supplier’s costs;
Rights to retain, set-off, or claw back fees in case of default;
Rights to suspend or terminate contracts – immediate in cases of irremediable breaches;
Obligations to flow-down the material provisions of the contract to downstream vendors;
Rights for the end customer to enforce contractual rights and invoke remedies directly against downstream vendors; and
Obtaining financial security in the form of bank guarantees and the right to invoke such guarantees in case of default.