The coronavirus pandemic has elevated “force majeure”—a rarely used, relatively obscure contract provision—to a top-of-mind issue for companies scrambling to figure out where gaps are forming in their supply chain.
Taken from French civil law, force majeure is “a contract provision that excuses a party’s performance of its obligations under a contract when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible,” according to a recent coronavirus and force majeure story in The National Law Review.
One company that tracks supply chain risk for multinational companies has seen a 44 percent increase in force majeure declarations this month among its customers’ supply chains, compared to March 2019. February’s force majeure warnings issued by companies in China and ocean container shippers have been followed in March by similar declarations in other industries and parts of the world.
“We expect to see that number continue to rise,” said Bill DeMartino, chief customer officer and managing director of Americas at riskmethods.
Headquartered in Munich, Germany, riskmethods uses artificial intelligence to track real-time supply chain disruptions and advises companies how to identify, assess, and mitigate supply chain risk.
DeMartino said when his customers receive force majeure notices, they hand them over to their legal departments to handle the details of how to dispute them. In the meantime, companies need to enact their contingency plans right away, he said, and ramp up their crisis response team.
“The question they need to answer is, ‘Can I find key parts from another supplier?’” he said. Another question to answer is, “Do we have the people in place to do the work?”
Some companies are running into labor issues caused by government response to the pandemic, he said. People cannot get to work, and some work—think manufacturing—cannot be done remotely.
Meanwhile, for attorneys, force majeure has become a force to be reckoned with, said Anton Ware, a Shanghai-based partner with the law firm Arnold & Porter Kaye Scholer.
“There is a tremendous amount of interest in this question and concern on both sides of the issue,” Ware said. All industries, in all parts of the world, are facing disruptions of one kind or another.
“Really, there’s no one who’s spared or immune from some impact,” he said.
Has the World Health Organization calling the coronavirus outbreak a pandemic made it easier for companies to invoke force majeure? Not necessarily, Ware said.
“How you label it matters a lot less than the facts on the ground,” he said, noting that a court will take a close look at the facts of the case and the contract itself. He expects a force majeure “wave of litigation and arbitration over the coming months and years”—even if the coronavirus outbreak subsides soon.
A recent blog post by Arnold & Porter lays out what companies should do if they receive a force majeure notice.
First, dig out the relevant contract, see if there is a force majeure clause, and determine if the disruption caused by the pandemic qualifies as a force majeure event. Ask for evidence of what caused the failure to comply and document all responses. If possible, “consider negotiating a written amendment to the contract to reflect a commercially sensible resolution,” the blog said.
If an agreement cannot be reached, brace for a drawn-out legal fight.
“Keep in mind that a force majeure notice may signal the beginning of a dispute that may ultimately need to be resolved through arbitration or litigation,” the blog post advised. “It is therefore important to take all of the usual precautions for a dispute situation, including for example preserving all relevant records and being careful not to inadvertently make statements or promises that may later form the basis for the other party to claim that you agreed to waive or forego contractual rights.”