Coronavirus and Distress – Do Your Contracts’ Force Majeure Clauses Cover You, Harm You, Mitigate Your Distress, Exacerbate Your Distress, or Warrant a Complete Overhaul?
February 3, 2020
Authored by: Mark Duedall
While no one can reliably predict the outcome, spread, or duration of the coronavirus outbreak, or its tragic human toll, its current effects on Asian and international supply chains are unprecedented. The economic distress may be isolated in the coming weeks (and we pray that is the case, and for the human suffering to abate), or the distress could reverberate over the coming months, or longer.
If your own supply chain depends on Asian imports, or if you are part of a larger supply chain linked to or intertwined with Asia, then could force majeure be implicated? Or could force majeure make things much worse for those depending on a reliable international supply chain? Unfortunately, no contract clause may be less scrutinized during the drafting process than the force majeure provision. Epidemic, pandemic, disease, quarantine, and the like are certainly included in what we may think is force majeure – but such events may only become relevant if they are actually listed in your force majeure provision. A few points:
First, if you do not engage in regular checkups of your contract provisions and your processes (i.e., if your contracting process is simply “take the last one and revise it,” thereby incorporating lost arguments, prior mistakes, and missed issues, nothing could be worse), now is the time of year to call BCLP – our cross-disciplinary and internationally placed supply chain lawyers can help you, at very reasonable or fixed pricing. We understand your business. Having trained commercial, litigation / arbitration, and trade lawyers in over a dozen countries also helps.
Second, as to force majeure – don’t rely on how a court or arbitration panel will interpret the language in question. If widespread disease and a resulting quarantine can disrupt your supply chain, then you need to include specific and appropriate language in the agreements with those to which you supply goods, materials, or services. Likewise, if your counterparty seeks to include such provisions in the force majeure clause you are negotiating, think about that in light of recent events and likely future pandemics – we all may need to consider a quarantine of major cities, cutting off transit routes, and similar actions the unfortunate new normal. Does your supply chain need actual (or contractual) improvement for the coronavirus or a future disease?
Third, if your counterparty mandates an expanded force majeure clause, include a requirement that it provide you with written notice as soon as the disruption begins, prompt (or real time) written updates, meetings, assistance, and anything else you can think of that would be commercially reasonable. Likewise, if you may need to resort to a force majeure clause, identify any applicable notice and similar provisions – now. Can you comply, if you must?
Fourth, if you want to utilize a robust force majeure clause now or in the future, consider a careful review of your existing contract provision, and implement “this language must always be included / can only change with [[business unit / legal / whomever express approval]]” in your templates. If you do not have templates or sound contract drafting protocols, call us.
Fifth, regardless of which side you are on – the force majeurer or the force majeuree (so to speak) – don’t let a court later decide what mitigation was required. Alternative suppliers outside the hot zone at reasonable cost? Same cost? Any cost? Existing alternative suppliers? New alternative suppliers must be found? Allocation of limited supply across all customers? (And, as in all your contracts, avoid any “best efforts” obligation on your part.) As with all crises, use this opportunity to figure out what you must do now on existing contracts and matters, and also what you must do in the future to improve your drafting processes, mitigate your risk, price in the risk you are actually taking, or offload your risk to third parties.
Finally, check your insurance, talk to your broker, and then check your insurance again (maybe with one of your BCLP colleagues). Clients are routinely surprised as to coverage they thought would be there, but is not – and coverage they never thought would exist, but does.