Coronavirus in Scotland: Distillers braced for hit - Nicola Gonnella

Many column inches have already been dedicated to the potential business impacts of coronavirus, including a shift to home-working and extending sick pay. But there’s also significant potential for disruption to supply chains.

The closure of bars, restaurants and event spaces in China will have no doubt dampened demand, says Gonnella. Picture: Getty Images

One industry which may be disproportionately affected is Scotch whisky production. China is the largest spirits market in the world and one of the biggest growth markets for Scotch whisky, importing £89 million of it in 2019. The closure of bars, restaurants and event spaces in China will have no doubt dampened demand.

The global reach of the pandemic grounding flights will have affected duty-free sales, too. Warning bells have already sounded – from Diageo, the world’s biggest drinks company, announcing a potential £200m loss through to Chivas issuing profit warnings linked to pressure caused by the pandemic.

As the numbers of coronavirus cases rise domestically, Scotch whisky producers must brace themselves for disruption to supply chains. They must consider whether they are protected if they can’t comply with contractual obligations due to supply chain failures caused by the virus.

The first step is to check whether existing contracts cover the business for such events. Force majeure clauses are often used to outline what happens if circumstances outside a business’s control stop it fulfilling obligations. But even if existing contracts contain force majeure clauses, they may not be defined tightly enough to provide cover. It is always helpful to include examples of the sorts of things the clause covers when preparing a contract – that way, there is less room for interpretation.

What about if a contract doesn’t contain these clauses? It’s possible for businesses to say that a contract is “frustrated” if something has made it physically or commercially impossible to fulfil a contract. However, any appeal to “frustration of contract” needs to satisfy much tighter criteria than force majeure, so firms shouldn’t consider it a safety blanket.

It is unlikely that existing contracts will cover the fall-out of pandemics specifically because of their rarity. The last pandemic was the outbreak of swine flu in 2009. But it is almost certain that future contracts will be drafted more tightly to cover the possibility of a repeat of the current disruption.

The year-long freeze on alcohol duty announced in last week’s Budget will help soften the blow for Scotch producers, as will the Chancellor’s pledge to lobby for the removal of the 25 per cent trade tariff on exports of single malt to the US. But these measures should be seen as limited comfort, rather than cure-alls, for the current situation.

Instead, Scotch producers need to be firmly on the front foot, proactively engaging with suppliers about contractual obligations before disruption hits and putting business continuity plans into action.

- Nicola Gonnella is a partner at Weightmans