Coronavirus: Force majeure clause and the supply chain

Supply contract agreement

Complying to the legal agreement during this testing time is difficult for suppliers and buyers as government measures to slow the outbreak’s spread has created tension on the supply chain, causing contracting parties to invoke force majeure clause.

Contracts are an important component of any procurement strategy because it helps define how will the buyer and seller perform based on stipulated agreements, say purchase agreements.

But what is a force majeure anyway? Cornell Law School defines force majeure as the;

“Provision commonly found in contracts that frees both parties from obligation if an extraordinary event prevent one or both parties from performing. These events must be unforeseeable and unavoidable, and not the result of the defendant’s actions, hence they are considered “an act of god”.

Many companies around the world, mostly on a supplier side, have been raising claims on force majeure arising from shuttered manufacturing and transportation lines, inability to deliver materials, missed agreed volumes, and so on.

While force majeure sounds a relief for contracting parties, most contracts do not contain the term pandemic or outbreak as an event of “act of God” in force majeure clause. Nevertheless, given the extreme global disruption of coronavirus crisis, COVID-19 is certainly one of those events.

Retail and energy industries are some of the top sectors seeking force majeure resulting from the coronavirus.

Total, a petroleum refining company, is among several power suppliers that tried to declare force majeure on buying nuclear power from Électricité de France S.A. (EDF) as the pandemic has pushed prices in the French electricity market far below existing contracts.

In the Philippines, distribution utilities and electric cooperatives have called power producers to cut generation costs being passed on to consumers as demand for electricity during the enhanced community quarantine continues to drop. Although power producers said they cannot relax their supply contracts with them because it would affect their ability to pay for fuel, operating costs, as well as loans, making it difficult for them to continue their operations.

WHAT CAN BE DONE?

Baker McKenzie, one of the World’s largest law firms, suggests some of the actions that companies can take to deal with legal options.

  • Review existing contracts, try to anticipate which of these are at risk of being affected (e.g. production facility closures, delays in the deliveries, and ability of parties to pay) and determine whether renegotiation of terms is a feasible option.
  • Consider any steps they may be taken in order to avoid or mitigate any potential adverse impact of COVID-19, e.g. alternative suppliers or alternative delivery methods.
  • Identify available remedies, whether or not provided in the contract, in anticipation of potential litigation, e.g. mediation/conciliation, dispute boards, and other alternative dispute resolution mechanisms.
  • Keep abreast of latest developments, including measures undertaken by the government, as they are relevant to determining the applicable remedies.
  • Consider these action steps in relation to contracts currently being negotiated.

The coronavirus teaches us how susceptible the global supply chain to a pandemic is. When one link of the chain is broken, all other entities within the supply chain begin to feel the strain, causing an interruption in the flow of goods. It requires collaboration across stakeholders not just to survive but to thrive despite the crisis. It calls government and supply chain players to work together to ensure a sustainable economy.

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