Force Majeure: A Non-Issue When it Comes to COVID Supply Chain Disruptions
Early in the pandemic, many lawyers were licking their chops, thinking about the stream of force majeure lawsuits that would be coming their way, with manufacturers suing suppliers, and vice versa, all using force majeure as a contractual escape hatch given the shortages and disruptions occurring across the supply chain. Well, hate to tell you guys, but this isn’t going to be the case.
In a webinar hosted by Tim Cummins in which we discussed many different things, force majeure was one of the topics we discussed. Tim mentioned how force majeure was not particularly helpful when it came to digging out of COVID-related shutdowns, primarily because the COVID crisis was NOT an unexpected event. Everyone could see that COVID would eventually hit the Western world, so it was almost a certainty that there was going to have some impacts. For that reason, it is almost irrelevant when it comes to contractual negotiations after a disruption occurs. As a precaution, the Chinese government issued a wave of force majeure notices to protect their manufacturing base who were supplying Western firms, to prevent litigation.
Where force majeure became relevant was in scenarios that involves relationships. We clearly witnessed how the retailers in the US that sent out mass force majeure notices to the owners of the properties they leased, telling them we won’t be paying the lease or abandoning it. There were other interesting examples like 3M, who were forced to ship supplies under a federal edict – to serve the US rather than other countries with PPE, thereby violating ther contracts. However, 3M didn’t end up using force majeure: they claimed “impossibility”.
In that respect, force majeur is a bit of a red herring. If there is a genuine force majeure, the parties could use impossibility as a basis for withdrawing from their contracts. We are really seeing the legal community, particularly external law firms, invoking impossibility. At the beginning people sent out force majeure notices, and in many cases the counter party refused to accept it, and as a legal principle it requires them to do all they can to mitigate the consequences. In such cases, all the FM did was to force to a conversation….something which should have happened in the first place! When disruptions occur, we need to find ways to work at this together. What it actually leads to is a mutually aligned position around dealing with uncertainty. What is important in cases such as the COVID crisis is the quality and nature of conversation, and embedding these decisions into contracts and governance provisions of how both parties will deal with uncertainty. For instance on payment terms, contracts of the future should include revisions around dealing with uncertainty and how that may alter the nature of payment terms. This could be no more than a behavioral commitment for parties to sit and work together to reevaluate the situation and re-set terms.