With the coronavirus sweeping through major manufacturing hubs in China, the government has mandated shutdowns in many cities. The mandatory evacuation and closure of many businesses and schools in the area has shut down a number of manufacturing facilities and distributors located in China. In addition, many companies based in the United States and elsewhere are suspending or limiting their operations in China.
The outbreak and resulting measures imposed by the government are impacting companies with manufacturing facilities, or suppliers, located in China. With no end to the outbreak in sight, the impact on the supply chain is likely to increase in the short term. Companies should review their supply chain and manufacturing footprint to assess whether they are at risk of having their operations disrupted. Companies also should consider their potential risk if the outbreak spreads to other major manufacturing hubs in Asia, such as Japan or Taiwan.
Affected, or potentially affected, companies should take proactive steps to mitigate their risk and prepare for how they will address any interruption to their operations or those of a critical supplier. One of the most important steps companies should take is to review their contracts to determine what “force majeure” rights and requirements may apply. Force majeure refers to a legal doctrine under which a party may be relieved from liability for non-performance if circumstances beyond the party’s control prevent the party from fulfilling its obligations under a contract.
Force majeure provisions can vary greatly depending on how they were drafted by the parties, but they usually cover several categories of events that could impact suppliers and customers across the supply chain. Many of these provisions include a list of specific events that may be considered a force majeure event under the contract. While most force majeure provisions are unlikely to list disease, epidemics, or quarantine specifically, many include general provisions covering such things as natural disasters, “acts of God,” acts of government, or “other circumstances beyond the parties’ control.” The coronavirus outbreak presents a somewhat unique situation in that it includes both a naturally occurring component (the virus itself) and a government action component (including the quarantines and other measures put in place in response to the outbreak). Parties should carefully review the force majeure provisions in their contracts to determine whether they apply.
Any party seeking to invoke the force majeure provisions in its contract usually must show that there are no alternative means for performing under the contract. Increased costs alone will not be sufficient to prevail on a claim of force majeure. For example, if a company is able to ship parts from a different manufacturing facility, even if that requires running extra shifts, paying employees overtime and/or expedited freight, then it will be very difficult to show that it was unable to perform under the contract.
While every situation is different, there are a number of best practices that most companies can follow when they invoke the force majeure provisions of a contract or when they receive a force majeure notice from a supplier: