Mediation and the resolution of complex aerospace supply chain issues

By Wolf Von Kumberg

04-2019

The Financial Times reported on Thursday the 11th of April that:

“Parts for the troubled Boeing 737 Max aircraft are stacking up across the global supply chain, raising the financial stakes for manufacturers as uncertainty continues over when the grounded plane will be cleared to return to the skies.  The fallout of the 737 Max crisis has spread to companies that supply crucial parts of the aircraft, following Boeing’s decision last week to cut 737 production from 52 aircraft to 42 per month from mid-April.”

Having spent 30 years as In-House Counsel to several global Aerospace Companies, it is my view that this crisis appears to be shaping up into a series of international legal disputes for Boeing.  Its General Counsel (GC) and the Board, together with their insurers, will need to evaluate the steps to be taken to head off or mitigate these disputes before they overwhelm the company and distract it from what its stakeholders actually want to do: supply aircraft. When a crisis such as this hits a company, the automatic reaction is to pull in the drawbridges, view those questioning the company as the enemy and to call in the lawyers to provide a robust defence. In the situation Boeing currently finds itself in, this line of action would likely hinder, not help, a return to normalcy. Boeing’s priority must be to find a quick and effective resolution with its suppliers.

Supply chains are a critical element of a global manufacturing network. They permit a manufacturer to source quality products, at best prices from anywhere in the world, with just in time delivery terms. They have changed the way goods are manufactured and ensure that benefits from a particular industry such as Aerospace or Automotive are spread the world over.  Supply chains are therefore an integral part of how today's companies do business, and the relations formed with suppliers are critical to the company's performance. In highly regulated industries, such as Aerospace, suppliers must be prequalified; and replacing suppliers once qualified can be a lengthy and expensive process. Supply chains, once established, can therefore be viewed as a valuable asset of the business, not to be toyed with.

This being said, what should Boeing now do to deal with the fact that it has had to ground the 737 Max, has slowed down its own production of the aircraft and faces cancellations of orders. It is reported that the cost to Boeing of the hiatus in deliveries of the new aircraft is $1bn per month. The cost of this slowdown to its suppliers is not yet known, but to many smaller suppliers it may very well become an existential question. Can they survive, and, if they do not, what is the cost to Boeing?

Given the critical relationship a manufacturer has with its supply chain, it cannot afford to allow disputes to interfere with its performance.  Whether it likes it or not, Boeing needs to find a mechanism to deal with these potential disputes in an effective and expedient manner, in order to ensure that, once the regulators agree the 737 Max can once again take to the skies, supply issues do not further impact its ability to deliver aircraft. 

From a litigation perspective, the long term outcome is uncertain, and this is not conducive to maintaining relationships in the shorter term. The process is adversarial and is not flexible, permitting only the legal issues presented to a tribunal to be dealt with. This does not address the needs, interests and priorities of the parties. It also leads to an imposed decision, rather than the parties being able to work out a resolution for themselves, which in turn hinders future relationships.

In my experience of dealing with supply chains and ensuring that they remain robust, I have found that a different type of dispute resolution mechanism is needed: one that addresses issues in real time and brings about a consensual outcome. Mediation provides this mechanism. Whether Boeing has built this mechanism into its supply chain terms is not known, but many other global companies are now doing so to ensure that critical supplier relationships are maintained.

Mediation is a consensual process agreed to by the parties to the supply agreement and permits for a neutral third party to be brought in when an issue first arises, before parties become entrenched in mudslinging. It is in fact facilitated negotiation, which permits exploration of not only the strict legal positions of the parties, but also their actual needs and requirements, in order to move to a settlement. Because it is not only the legal issues that are discussed, the process permits for flexible outcomes that deal more with the future of the relationship and how it can be maintained. For example, in the Boeing situation, it might lead to a supplier providing parts for other Boeing aircraft to substitute for orders delayed or lost on the 737 Max. It might also call for Boeing accepting orders being delivered, even though technically the parts are not yet needed. The process also permits for sub-suppliers and others affected by situation to be brought into the mediation, thereby resolving all potential disputes at one time. There are any given number of possible outcomes through mediation, whereas in litigation there is simply a winner and loser, and usually neither party is fully satisfied.

The other benefit mediation affords is expertise in the person selected to be the mediator. In highly technical industries such as Aerospace, having a mediator that has knowledge of the intricacies of supply chains - and the technology related to complex aircraft - can assist the parties to find a practical solution, something a Court and Judges are ill equipped to do. The American Arbitration Association (AAA) has, for example, established a special mediation and arbitration panel of former Aerospace Counsel known as the Aerospace, Aviation and National Security Panel, with significant and relevant industry experience.   The UK mediation institution,  CEDR, also has a panel of mediators who are expert in dealing with technology issues. These panels exist to deal with precisely the type of supply chain crisis Boeing is now facing.

Paul Briggs, joint head of the firm Aviation & Defence sector group commented, "we are acting for a number of airlines with MAX aircraft delivered/AOG and on order.  For some it's an existential crisis going into the Summer season.  We think it's necessary to be clear with Boeing that Boeing will be held responsible for all losses but it's also important to work with Boeing to restore public confidence and get the MAX flying.  We are teamed with Lane Powell in Seattle, the largest firm in Washington State that does not act for Boeing."

Boeing now has a choice: to take a pragmatic view of the legal and practical issues the grounding of the 737 Max has caused to its supply chain and find a swift solution through mediated settlements; or to go to war with the very companies that are its life blood. The choice for any rational thinking board is an obvious one.

Author Wolf von Kumberg was the Assistant General Counsel and European Legal Director for Northrop Grumman Corporation and Litton Industries, Inc and is now a consultant advising Bird & Bird.