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Force Majeure

COVID-19 and Force Majeure: A Closer Look at the Supply Chain Clause of the Moment

July 9, 2020
Alert and systematic management of these disruptions and claims can preserve relationships that have been built over years and avoid costly break-ups.

Global industry is now almost six months into the COVID-19 pandemic and its effects on supply chains, and the broad features of the event are becoming clearer. As the first wave of the pandemic has washed around the world, few businesses, and fewer sectors, have been unaffected.  About 75% of American companies have experienced at least some supply chain disruptions, according to an early survey by the Institute for Supply Chain Management.

A recent global survey by procurement network Procurious revealed that 97% of international supply chain professionals had encountered such issues. Some sectors, such as agriculture and food processing, have seen sharp increases in demand or shifts in demand channels, and pivoted swiftly into new opportunities. Others, such as aviation and apparel, have encountered demand collapses and faced extremely difficult supply chain management and continuity challenges. And most sectors have encountered at least some level of supply disruption, especially from governmental countermeasures and resulting disruptions to supplier operations and logistics. 

Nearly one-third of respondents to the Procurius survey reported that they had already faced a claim that a supplier or customer was excused from performing their obligations under an agreement because of the law of force majeure.

The general legal concept of force majeure includes several different specific doctrines, which are applied by different countries and U.S. states in different ways. Broadly speaking, the concept allows one party to a contract to claim a right to suspend, or stop, their fulfillment of their end of the bargain, because of an intervening event that is outside of their control and that overcomes their ability to perform as both parties had expected. The party claiming the excuse sometimes has to offer a partial allocation of supply or other interim measures.  The party on the receiving end of the force majeure claim is generally entitled to accept or reject that offer, and sometimes is authorized to terminate the contract entirely. The parties’ discussions – and any lawsuit that might result – are often governed by force majeure clauses contained in their contract. 

When the contract doesn’t contain a force majeure clause, the national laws of at least one country might apply, and those laws also vary widely in the rules they impose. 

To make matters worse, the COVID-19 pandemic is unlike the sorts of events to which force majeure law usually applies, and presents risks from multiple angles.  The “usual” force majeure event – like a facility fire or a hurricane – is limited in time, scope, and geographic place. It affects only a certain group of businesses, and only one party to each affected business relationship. 

The current pandemic, however, and the governmental countermeasures to it, is persistent and worldwide. It is affecting almost all sectors, and many businesses are facing challenges both as customers and as suppliers, and across the range of their own functions, including not only supply and sales, but also facilities, corporate finance, and even HR.  Force majeure disruptions, at this moment, thus can appear also to be pandemic in nature.

Alert and systematic management of supply chain disruptions and force majeure claims can preserve relationships that have been built over years and avoid costly break-ups.  Companies that have been successfully riding out the event thus far have taken a range of steps to stay as steady as possible:

Maintain “eye contact,” and keep an eye out. Many supply arrangements already include information-sharing and collaboration requirements; review your contracts for these sorts of provisions and use them to maintain visibility into supplier operations and as a basis for additional communication and collaboration. Many organizations are also deploying new transparency requirements and technology solutions to achieve better surveillance of overall supply communities – across markets, candor is becoming more systematic than occasional.  At the same time, also review the force majeure provisions of your contracts to understand what can trigger an excuse from performance; the limitations of the counterparty’s rights to an excuse; and your own rights if they claim one.

Don’t take the claim at face value. It certainly can seem as if a global pandemic and state-ordered shutdowns must qualify as “acts of God.”  But the law on the subject differs widely from place to place, and is designed to be flexible.  Most cases will be highly fact-specific, and subject to discussion and maneuvering.  Don’t just inquire into a supplier’s or customer’s experience: Research the specific situation in the specific place and business context, and consider whether the event itself is really the cause of the other side’s difficulties, or if some other factor might be at least partly responsible (and thus a basis to push back against a demand for an excuse, and seek a better accommodation).

Be flexible and creative.  By spotting issues as they arise rather than when they become acute, and assessing your position before hard decisions have to be made, you also prepare the ground for a cooperative solution. Force majeure law itself often provides for accommodations such as allocations of supply and temporary changes to contract requirements, which can be initial responses to moderate disruptions. Businesses facing more serious disruptions have been going further, negotiating price changes and financial support, arranging for collaboration between primary suppliers and backups, and offering longer-term order commitments for their business partners’ use as support for credit. Even if an issue turns into a surprise, don’t let the uncertainty of the situation result in a loss of control – try to tighten up the relationship and preserve it.

Be ready for a disruption to get worse.  The overwhelming majority of business relationships are surviving the COVID-19 pandemic. But there have already been high-profile breakdowns in business-critical relationships, and many others are being severely tested. Moreover, with so much disruption and uncertainty, there will be suppliers and customers who ultimately can’t return to their previous capabilities – and others who will attempt to take advantage of the situation.  Review your contracts’ dispute resolution provisions, too, and consider whether to seek changes, in your discussions with counterparties. In particular, consider whether to agree to submit any force majeure disputes to expedited arbitration, which avoids the backlogged courts, maintains confidentiality and can save time and costs.

The COVID-19 pandemic will be with us for some time to come, and for business the waters will remain choppy at best and treacherous at worst. Careful, systematic and forward-looking management of the supply chain disruptions that are occurring now and are still to come will very often make the difference in results. And in some instances, those results will be the difference between capsizing and a safe return home after a long and perilous journey.

Tim McCarthypractices litigation and international disputes nationwide and around the world from the Dallas office of Dykema Gossett LLP.

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