Coronavirus Meets Force Majeure
A Back to Business Article
By Bart Higgins
Large and small businesses are dealing with the fall-out from COVID-19. At Shields Legal Group, we want to give practical, actionable steps for you to take inside your business during the COVID-19 pandemic. That’s why we created Back to Business, a place where you can go to learn more about navigating these uncertain times.
Today’s focus concerns when contractors can’t or won’t deliver their products. If you are the end-user, what do you do?
ABC Company and Coronavirus
Let me share a fictional story about ABC Company who developed a new computer product line. Sarah Blont, a Senior VP, negotiated several supply contracts with companies in China and Nebraska, to provide necessary components for the computers.
In the last quarter of 2019, Sarah made several trips to China to check on the manufacturing facilities and production. The Chinese company was very specialized and highly regarded in the production of computer chips.
Sarah first learned of the coronavirus when the Chinese manufacturer missed a production deadline at the end of the year. The Chinese company quarantined its employees, and the production line was at a standstill.
ABC Company’s troubles were just starting. Their Nebraska supplier needed oil to produce the plastic parts for ABC’s computers. When oil prices plunged in early 2020, the Nebraska company didn’t meet their quota. The company’s executive explained that the low contract price with their supplier was how they could manufacture the parts so reasonably. Their supplier shut down, and the Nebraska company didn’t look for another supplier, even though options were available.
ABC Company faced a difficult situation. The new computer line was projected to generate a significant portion of its 2020 profits. This project was Sarah’s claim to fame, and there was no way she was going to allow these manufacturers off the hook. She called in Amy Rasor, general counsel for ABC Company, to learn what legal options were available.
A Legal Review
The first thing the attorney did was to gather all of the contracts and insurance policies. She was especially interested in the Force Majeure Clause, which excuses a party’s performance of its contractual obligations under the circumstances beyond the party’s control.
A force majeure clause typically states that the event is:
· beyond the reasonable control of the affected party;
· not the result of any act, omission or delay of the affected party;
· could not have been reasonably foreseen, avoided or mitigated by the exercise of reasonable measures; and
· causes or results in that party not only being able to perform its obligations.
The attorney also told Sarah that when the supply contract lists specific events that are considered a force majeure event, such as acts of nature, governmental action, and Acts of God, then these clauses are interpreted narrowly. If a party tries to include an unlisted, similar event, it will not be considered.
There were more considerations. Amy, the attorney, explained that even if the force majeure conditions are satisfied, ABC Company always includes exclusions that would not be considered force majeure events. As a result, if the supplier invokes the force majeure clause, they would have to show that a force majeure event has occurred and prove that no exclusions apply.
Turning to the two supply contracts at issue, Amy confirmed that those contacts had the same force majeure clause:
Force Majeure. Neither party shall be liable to the other for any [actual] delay or failure in performance due [solely] to [any causes or events beyond its reasonable control, including without limitation,] any act of God, fire, flood, severe weather, earthquake, strike, or other labor problem not caused by the employees of either party, terrorism, war, governmental actions, civil disturbances, pandemics, epidemics, quarantines or other health crises, and shortages of labor or materials [as a result of any of the foregoing] (collectively, “Force Majeure”). Delay or non-performance due to Force Majeure shall be excused and the time for performance shall be extended to include the period of such delay or nonperformance caused by Force Majeure. Force Majeure does not include a). an ability to pay amounts when due; b). breakdown of machinery due to a lack of maintenance or normal wear and tear; c). a loss of market; d). financial hardship or inability to pay; e). economic downturn; f). and/or compliance with laws that only or primarily apply to the affected party and not other parties doing business in that country.
When the attorney applied the force majeure clause to the events in China and Nebraska, she advised that the coronavirus virus would allow the manufacturer in China to delay or excuse their performance under the contract for the period of non-performance. ABC Company would still be required to make any payments owed under the contract for all products delivered. Because this particular manufacturer is the best in the business, and they were hired to produce highly specialized items, alternative suppliers are not an option.
As a way to move the Chinese Company forward, Sarah could call and find out more about their situation. When could production be resumed? How long will the government shutdown last? Are there any parts that could be shipped, despite the pandemic?
The Nebraska supplier’s situation was a completely different story. The shortage of oil caused by their preferred vendor doesn’t fall within any specific force majeure event. There are alternative vendors available, even if they are less practical and more expensive.
The legal situation also had to be considered alongside the business context. It may be more critical to ABC Company to maintain these long-standing relationships. Even though the Nebraska Company’s position may be on shaky legal ground, the benefits of continuing to do business with them had to be factored into any decisions.
At the end of the meeting, the attorney gave Sarah one last piece of advice. If Sarah tests positive for COVID-19, she may have a worker’s compensation claim for contracting the disease during her work visit.
The world of business has drastically changed in the last several weeks. That’s why we created Back To Business, to share our knowledge and expertise so you and your business can survive.
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As we continue to navigate through these uncharted waters, please visit Back to Business. We have created videos that share valuable information and practical tips on what to do during this time.
Shields Legal Group is here to help you and your business recover from the impact of COVID-19.
Be safe. Be well. Be healthy.