“Love in the Time of Cholera” is one of my favorite books by Gabriel Garcia Marquez. “Force Majeure in the Time of Coronavirus” is still being written, but even though it won’t be as entertaining as Marquez’s book, it will be an important read for supply chain and logistics professionals.
“Supply chain partners commonly allocate the risk of disaster through force majeure clauses in their contracts,” writes Sarah Rathke, a partner at the law firm Squire Patton Boggs. “From the French, meaning ‘superior force,’ a force majeure clause allows parties to excuse or delay contract performance in the event a specified risk materializes. Often, the force majeure events that excuse performance are weather disasters, but sometimes they extend to labor issues, political disruptions, and even sub-supplier nonperformance as well.”
Rathke adds, “Not surprisingly, buyers generally do not like broad force majeure clauses, and suppliers often want them. What is surprising, however, is that when force majeure clauses are included in supply chain contracts, they are often treated as mere boilerplate and are not the result of a thoughtful examination of what the potential supply chain risks actually are [emphasis mine]. It makes sense to apply thought and analysis to force majeure clauses, however, since disaster related disputes can turn into high-stakes, high-dollar fights.”
These excerpts come from a blog post Rathke wrote in March 2015 in the aftermath of the West Coast Ports labor dispute. The lessons learned from that disruption (if they were learned at all) apply today as the novel coronavirus outbreak disrupts supply chains around the world.
What if your supply chain contract does not contain a force majeure clause? Rathke addresses that question in a follow-up post:
If a supply chain contract does not contain a force majeure clause, then – not surprisingly – supply chain disputes become even more likely. In the West Coast Ports situation, economists tell us that the financial impact to U.S. companies has been very high, and that we are not even remotely done feeling those costs. In short, we fully expect litigation here. Many companies and their senior management will not be able to bear the unexpected increased costs.
Ms. Rathke was my guest on Talking Logistics in February 2015. The topic of our conversation was “Legal Advice On Developing Successful Supply Chain Relationships.” This seems like a good time to watch that episode again.
Analyzing a Force Majeure Clause
In a blog post published last week by the National Law Review, Tiffany D. Presley and Jamal Abdulrasheed from Barnes & Thornburg LLP offer some advice on force majeure clauses and how to navigate coronavirus supply chain disruptions. Here are some excerpts:
When analyzing a force majeure clause, as either the buyer or supplier, you must determine: 1) what events constitute a force majeure event under the contract, 2) should a qualifying event occur, does the provision totally relieve a party of an obligation to perform a contractual obligation or merely suspend or delay of performance until the conclusion of the force majeure event? 3) whether either or both parties are required to mitigate losses, and 4) whether counterparty notice is required and the form of such notice.
If you have commercial contracts that have or may be affected by the spread of coronavirus, you should consider taking the following additional steps, in addition to reviewing any force majeure clauses:
Identify which of your products and facilities and that of your Tier 1 and Tier 2 suppliers are in locations affected by the coronavirus
Develop a company-wide approach for making and responding to force majeure claims
Explore potential alternative sourcing and shipping options that may allow you meet contractual obligations, even if they are more expensive
I recommend that you read the full post for additional advice on what actions to take today to limit the impact of this disruption.
“Force Majeure in the Time of Coronavirus” is still being written. My guess is that it won’t be a love story.