Managing the Commercial Impact of the Coronavirus Outbreak: Force Majeure Declarations

The National Law Review ^ | Thursday, January 30, 2020

[nickcarraway]

With the coronavirus sweeping through major manufacturing hubs in China, the government has mandated shutdowns in many cities. The mandatory evacuation and closure of many businesses and schools in the area has shut down a number of manufacturing facilities and distributors located in China. In addition, many companies based in the United States and elsewhere are suspending or limiting their operations in China.

The outbreak and resulting measures imposed by the government are impacting companies with manufacturing facilities, or suppliers, located in China. With no end to the outbreak in sight, the impact on the supply chain is likely to increase in the short term. Companies should review their supply chain and manufacturing footprint to assess whether they are at risk of having their operations disrupted. Companies also should consider their potential risk if the outbreak spreads to other major manufacturing hubs in Asia, such as Japan or Taiwan.

Affected, or potentially affected, companies should take proactive steps to mitigate their risk and prepare for how they will address any interruption to their operations or those of a critical supplier. One of the most important steps companies should take is to review their contracts to determine what “force majeure” rights and requirements may apply. Force majeure refers to a legal doctrine under which a party may be relieved from liability for non-performance if circumstances beyond the party’s control prevent the party from fulfilling its obligations under a contract.

Force majeure provisions can vary greatly depending on how they were drafted by the parties, but they usually cover several categories of events that could impact suppliers and customers across the supply chain. Many of these provisions include a list of specific events that may be considered a force majeure event under the contract. While most force majeure provisions are unlikely to list disease, epidemics, or quarantine specifically, many include general provisions covering such things as natural disasters, “acts of God,” acts of government, or “other circumstances beyond the parties’ control.” The coronavirus outbreak presents a somewhat unique situation in that it includes both a naturally occurring component (the virus itself) and a government action component (including the quarantines and other measures put in place in response to the outbreak). Parties should carefully review the force majeure provisions in their contracts to determine whether they apply.

Any party seeking to invoke the force majeure provisions in its contract usually must show that there are no alternative means for performing under the contract. Increased costs alone will not be sufficient to prevail on a claim of force majeure. For example, if a company is able to ship parts from a different manufacturing facility, even if that requires running extra shifts, paying employees overtime and/or expedited freight, then it will be very difficult to show that it was unable to perform under the contract.

While every situation is different, there are a number of best practices that most companies can follow when they invoke the force majeure provisions of a contract or when they receive a force majeure notice from a supplier:

Review the applicable force majeure provisions to determine what the provision allows and whether the current situation is covered.

Confirm that the notice requirements under the contract have been met. Note that some force majeure provisions have time limitations on reporting the force majeure event after it occurs, so this step should be completed as soon as possible.

Provide or obtain as much information about the specific force majeure claim as possible, including the timing, the number of impacted parts/facilities, and when the force majeure event is expected to conclude. If complete information is not available, the declaring party should supplement its notice as additional information becomes available.

The parties should work together to assess inventory on hand, whether there is a bank of parts that can be accessed, whether there are other manufacturing lines available at different locations, and the affected supplier’s allocation plan (note: a “fair and reasonable” allocation across customers is required under UCC § 2-615(b)).

Consider whether and when an alternate supplier can be ramped up.

Be aware of the other party’s rights if force majeure is invoked, which may include the right to terminate and source from an alternate supplier or to terminate after a certain period of time.

Look across the company’s supply chain to determine whether its suppliers have facilities that might be impacted by the coronavirus and begin considering contingency plans.

If the company has received a force majeure notice from one of its suppliers, evaluate whether that notice triggers a force majeure event for the company, requiring that notice be provided to its customers.

[LesbianThespianGymnasticMidget]

Lot of companies are going to take it hard in the shorts with this. International transaction contract always have a Force Majeure clause. Chinese suppliers will not be in breach of contract if they don’t perform.

[rdcbn]

This is going to expose a lot of the downsides of our offshoring policies and should result in revisions of many companies strategic visions on foreign production.

Big take away, President Trump was right on many of his industrial policies.

Kind of amused at the discussion of force majeure clauses given that one of the potential pitfalls of this emerging Black Swan event is that supply chains in China often extend to other less developed asian countries where the whole concepts of contracts and basic property fights are kind of murky, business ethics are lacking and enforcement mechanisms for contracts are rudimentary at best.

Lots of distressed product can potentially disappear overnight due to lack of security and supply chains can breakdown as the handoffs become difficult, if not impossible due to closure of borders or breakdowns in transportation

American manufacturers can have disruption due to shortages of critical production products , parts and raw materials - many, if not most, have no domestic supply source because they have either left for China or have been driven out of business by Chinese competition. Lots of decision makers are beginning to sweat over the potential and the rational end result should be a move to develop domestic suppliers for critical materials and products.

Equally ominous is that China’s pool of competent managers and technical people is relatively thin and they do not have deep benches to draw from. God forbid, but if this gets bad we could see a replay of the loss of hard to replace talent and key players we saw in Africa due to AIDS crisis

[null and void]

Wiggle one thread in an economic network, and the whole web quivers.

Bring Out Your Dead

Post to me or FReep mail to be on/off the Bring Out Your Dead ping list.

The purpose of the “Bring Out Your Dead” ping list (formerly the “Ebola” ping list) is very early warning of emerging pandemics, as such it has a high false positive rate.

So far the false positive rate is 100%.

At some point we may well have a high mortality pandemic, and likely as not the “Bring Out Your Dead” threads will miss the beginning entirely.

*sigh* Such is life, and death...

If a quarantine saves just one child's life, it's worth it.

[hardspunned]

However this plays out, it will greatly further Trump’s bid to decouple the Chinese from the American economy.

[BobL]

I was wondering how long China can lock-down 60 million people with it affecting the rest of the world.

Not that anyone here buys stuff made in China*, but if they did, they should SERIOUSLY consider buying it now (or stocking up on it, if it gets consumed, like toilet paper).

But also consider other direct effects, even things that are ‘made in America’ typically have tons of foreign content, at the lower levels (perhaps chemicals used to make the plastic for their shells, or circuit components, etc.).

And finally consider the secondary effects, which will hit later. How about spare parts for the machines used to manufacture American products, or even run our power plants?

*I know, I know, even if we want to only Buy-America, we cannot. The Globalists made sure of that (thanks, Bushes). We’re all going to be impacted...by this, and if the country goes into full lock-down, God help us.

[cyclotic]

I can see that happening and was thinking about it the other day. The company I work for is a chemical manufacturer. Many of the raw materials are only available overseas. I can see some serious supply chain issues hitting soon

[Jim Noble]

I am moderately optimistic about Europe and the United States, and possibly Canada, getting out of this OK.

I am a radical pessimist about China. I think the Chinese leadership and their children will flee, the state will collapse, and the “China trade” will not “return to normal” for many years, if ever.

The Party’s over.

[ProtectOurFreedom]

For the short term, supply chain disruptions can cause US and international stocks to drop. For the long term, domestic manufacturing will increase and the jobs market will get even tighter. Will that push US stocks higher?

[donozark]

A couple weeks ago I speculated on the danger of Coronavirus if it hits Africa. Last night on CNN a specialist voiced the same concerns. Especially if it gets into the Ebola areas of the Congo. And how on earth would WHO of any other helping agency be able to quantify with any certainty the numbers infected/dead? Nightmare in Mogadishu...

[Jim Noble]

A couple weeks ago I speculated on the danger of Coronavirus if it hits Africa

There are no international or transnational implications of coronavirus in Africa (unless we are stupid enough to take refugees).

The collapse of the Chinese state, on the other hand, would be transformational.