The COVID-19 outbreak signifies an unanticipated and overwhelming event, so far infecting approximately 27.6 million people worldwide and resulting in the death of at least 898,000 (these figures will tragically be materially out of date as soon as this article is published). Naturally, the primary focus is on the human impact, with measures being taken by governments to limit the spread of the virus.
Actions by government authorities in quarantining areas and shutting down businesses and restricting movement have caused significant disruption to supply chains around the world. As a result, manufacturing and distribution have been significantly impacted.
The extent of supply chain disruption
Supply chains the world over have been adversely impacted by the impacts of the COVID-19 crisis in two significant ways:
The situation and its impacts are mercurial, sometimes shifting beneath our feet on an hourly basis.
Faced with these circumstances, the immediate questions for manufacturing businesses include:
Unfortunately, most supply arrangements did not foresee anything like the COVID-19 situation arising and so do not contain any clear roadmap as to how businesses are to navigate their contracts in the current circumstances.
As a result, most businesses are looking to their contracts (e.g. supply agreements, distribution agreements, manufacturing agreements, transport and logistics agreements) to see whether ‘force majeure’ provisions may be used against or by them and whether there are any other ways to avoid the adverse impacts facing them.
A force majeure (literally ‘superior force’) clause allows one or both contractual parties to cease or suspend performance of a contract following the occurrence of a pre-defined ‘force majeure event’.
If successful, the party will not be liable for failing to perform its obligations under the contract. It may also give rise to termination right, usually where the force majeure event continues for an extended period.
In most common law countries, such as Australia, there is no independent legal concept of ‘force majeure’. As such, it is a creature entirely of contract and the scope and effect of any such clause is dependent on its particular terms. In most cases, they contemplate acts of God, extreme weather events, riot, war or invasion, government or regulatory action including strikes, terrorism or the imposition of embargo as being ‘force majeure events’ in respect of which a party may be relieved of their liability for failure to perform. Many such clauses also extend to include pandemics or epidemics, which may apply in the current circumstances.
It is also important to consider whether the clause in question applies only to ‘direct’ impacts of a force majeure event or also extends to ‘indirect’ impacts, given that many of the factors impacting supply chains at the moment are more likely to be characterised as indirect or flow-through impacts of the COVID-19 situation.
Unfortunately, many manufacturing arrangements drafted from the ‘buyer’ or ‘customer’ perspective exclude failure to secure supply of materials or components from being a force majeure event.
If a business is seeking to invoke force majeure, it must consider carefully whether it is able to do so under the relevant contract. A party could be in breach of contract, risk termination and potentially damages claims if it fails to meet its obligations and cannot rely on force majeure, or if it invokes force majeure and ceases to perform when it is not entitled to do so.
To successfully invoke force majeure, a business will also need to ensure compliance with any other contractual obligations that may include providing prompt and correct notice and seeking to mitigate any loss that might otherwise be suffered (e.g. by seeking alternative sources of supply or alternative ways to perform the contract).
It is equally important to proactively consider whether your counterpart might be able to rely on a force majeure clause to delay or avoid its performance obligations, so that you can prepare for this possibility and assess in advance whether it will impact your arrangements further downstream.
If your suppliers are unable to rely on force majeure, it is more likely that they will be liable to compensate you for any delay or failure to perform the supply. If you are able to rely on force majeure, it is more likely that you will be able to claim relief from your delay or failure to perform.
Given the potentially significant impact on your legal rights and obligations, you should be looking into this issue now, so that you can navigate a course through this outbreak.
Authors: Nathan Cecil
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.