As a result of the COVID-19, Coronavirus (CV), crisis, many manufacturing supply chains are likely to be impacted. Some factories are closing down and will not be able to meet all their product delivery obligations for the foreseeable future.1 As a consequence, many companies will need to dust off their contracts and review their force majeure clause if they have one.
Force majeure is a legal term that literally means superior or irresistible power and refers to natural and unavoidable catastrophes that interrupt the expected course of events.2 Any supplier who production and delivery schedule has been affected and can’t perform their contractual obligations due to the CV outbreak could declare a force majeure. When declared, the supplier may have the legal right to suspend or even terminate the deal.
Although it would be unusual to apply force majeure to illness, the sheer magnitude of the impact of CV is likely to cause suppliers to make the argument. Many experts believe such a legal argument could have merit.3
To complicate matters, the laws surrounding force majeure vary by country. Even more of a deterrent to legal action is the power the Chinese government can wield against any would-be legal challengers to one of their companies. When it comes to manufacturing, China is the 800-pound gorilla in the room. China is known as the world’s factory representing about 20% of all manufacturing around the world. Challenging them may result in short-term gain at the expense of long-term retaliation.
So, what is a company to do? My suggestion would be to confirm the impact of the CV outbreak and then negotiate a mutually agreeable solution that takes into account ‘good faith’ burden sharing and accommodation.
Based on my history in project oversight and change order management, below are some considerations when negotiating a claim of force majeure.
1. Make the supplier be specific about the impact of the event, then apply the following questions to these specifics:
- Should the supplier have anticipated the condition or impact sooner?
- Did the supplier have an opportunity to mitigate the impact? If so, did they?
- Was the impact or delay concurrent with other circumstances that had already delayed or disrupted progress? For example, if productivity was already stalled at the time of the event for other reasons, then no compensation would be warranted.
2. Review the contract requirements. A well-crafted contract may have language that can act as the starting point and outline for negotiation.
3. Review the laws for the country of jurisdiction. As previously stated, force majeure laws may vary widely by country. For example, if it’s a Saudi supplier impacted by CV, then the negotiator may need to know the Saudi principles for force majeure in Shariah law.4
4. Estimate the value of the impact to your principal. It’s hard to burden share without knowing what your burden actually is. If the parties cannot agree on an estimate, consider using a 3-party estimating firm.
5. Consider amendments to the contract. For example, the negotiated agreement may trigger the need for one or more of the following:
- Adjustments required to the contract price.
- Adjustments required to the milestone payments.
- Adjustments required to the baseline schedule.
- Amendments required to contract documents.
6. Lastly, know the BATNA (best alternative to no agreement).
One last word about negotiating an agreement following a force majeure event. In our opinion, a force majeure is not an opportunity to maximize profits by sticking it to the contractor or the client, regardless of any game-theory payoff table that might suggest otherwise. Force majeure, by definition, is nobody’s fault. Remember the golden rule. Do the due diligence to confirm the claim is not frivolous, estimate the impact, and then negotiate a settlement in good faith that appropriately shares the burden between the parties.
1 Esfandiari, Sahar. (2020), These are all the companies who have shut down operations in China over the deadly Wuhan coronavirus outbreak, Business Insider, Australia, https://www.businessinsider.com.au/wuhan-coronavirus-which-companies-shut-down-operations-move-employees-2020-1
2 Content Team (2015), Force Majeure, Legal Dictionary, https://legaldictionary.net/force-majeure/
3 Nightingale, Alaric & Longley, Alex. (2020), When God Appears in Contracts, That’s ‘Force Majeure’, Bloomberg Quick Take, https://www.bloomberg.com/news/articles/2020-02-06/when-god-appears-in-contracts-that-s-force-majeure-quicktake
4 Albrak, Hoda, Asuhaimi,Farhanin, Mohammad Udin, Nurzihan. (2018), The Principle of Force Majeure in Shariah: A Special Reference to Saudi Contract, Research Gate, DOI: 10.7456/1080SSE/150