It is quite common in supply chain contracts for the buyer and the seller to have competing interests in negotiating key contractual provisions and protections. Before COVID-19, force majeure provisions were often just an afterthought in contract negotiations, with very little difference regardless of whether the manufacturing company was on the buy- or sell-side of the contract and without regard to the specifics in the supply relationship. Instead, manufacturers would copy the same, tired force majeure language across all of their contracts, which typically would be found buried at the bottom of the contract in the “Miscellaneous” section.
In the current COVID climate and given the lessons learned as force majeure disputes continue to ricochet through supply chains across nearly every industry, force majeure provisions and related risks have a renewed focus. Going forward, manufacturing companies and their counsel will focus on mapping their supply chains and the related risks. Risks will vary depending upon the volumes, timing of the program, the geographic location of the plant, suppliers and even sub-suppliers, whether the products are ordered on a JIT (Just-In-Time) basis, whether the parts are sole-sourced or there are alternate suppliers available, and whether safety stock or inventory banks are accessible. Manufacturing companies will then use future contract negotiations and form commercial documents to allocate the various risks accordingly.
Key categories of force majeure events include risks that prevent or delay contractual performance due to the following events and circumstances:
|Natural Disasters||Plant-Specific Issues||Government-Related||Disease||Other|
|Acts of God||Plant Fires||Government Action||COVID-19||Riots|
|Hurricanes||Plant Explosions||Acts of War||Epidemics||Terrorism|
|Earthquakes||Power Outages||Tariffs||Other Viruses||Other Labor Issues|
|Wild Fires||Machinery Issues|
Although each supply contract is different, there are some high-level guidelines that manufacturers should consider when tailoring and negotiating force majeure provisions. These considerations will differ depending upon whether the manufacturer is the buyer or seller and the various ways that the supply chain could be disrupted.
As with all divergent interests in supply chain contracts, the competing positions of the buyer and seller should be addressed during contract negotiations. For example, the party that agrees to bear risk if there is a force majeure event may leverage this risk against pricing or termination rights.
In addition to the language of the force majeure provision, there are other contract provisions that manufacturers should strengthen and best practices to implement as a result of lessons learned from COVID-19. When the pandemic began and various executive orders required manufacturers to shutter, there were a flurry of issues that impacted manufacturers. Force majeure notices were sent, but parts already were in transit—who pays for the costs to return those parts when there was no one onsite to receive them? There were situations where a plant in one location had to be closed, but other manufacturing facilities had capacity—who pays for the costs to tool up and ramp up at an alternate location or for employee overtime? Throughout the pandemic and the reopening phase, there have been additional costs incurred in manufacturing lines, including employee overtime and freight expedites—who pays? These are just some examples of the types of responsibilities and risks that can be allocated in supply contracts going forward.
For more information about recommended steps, please contact your Foley relationship partner or the author listed below. Companies in all sectors of the economy continue to be impacted by COVID-19. Foley’s here to help our clients effectively address the short- and long-term impacts on their business interests, operations, and objectives. Foley provides insights and strategies across multiple industries and disciplines to provide timely perspective on the wide range of legal and business challenges that companies face conducting business while dealing with the impact of the coronavirus. Click here to stay up to date and ahead of the curve with our key publications addressing today’s challenges and tomorrow’s opportunities. To receive this content directly in your inbox, click here and submit the form.