Coronavirus (COVID-19), Force Majeure, and the Supply Chain

Coronavirus (COVID-19), Force Majeure, and the Supply Chain

As the coronavirus (Covid-19) continues to cause global alarm with government-mandated shutdowns, travel holds and mandatory evacuations, companies need to review their supply chain and prepare to address disruptions to critical supply lines. The outbreak and subsequent operational closures are severely impacting organizations with Chinese manufacturing facilities and suppliers. In recent news, Mobile World Congress (MWC), arguably the world’s most important tech trade show, has been canceled due to concern over the coronavirus (Covid-19) outbreak[1]. The event’s organizers, GMSA made the announcement just two weeks before doors were set to open. In light of this, the GMSA will certainly need to review all of its vendor contracts for force majeure clauses. 

But what is force majeure? A “force majeure” clause is a contract provision that relieves parties from performing their contractual obligations when certain circumstances beyond their control arise, making performance inadvisable, illegal, or impossible[2]. While force majeure provisions can vary greatly depending on the contract language used, they usually cover several types of events that could impact suppliers and customers across the supply chain. Oftentimes, these provisions include a holistic catalog of events that may be considered a force majeure event under the contract—generally covering such things as natural disasters, “acts of God,” and acts of government. Supply chains are becoming more and more complex, and as such, the sourcing, procurement, and commercial managers need to be able to manage risk at scale. In times of disaster, it is not a question of if the supply chain will be impacted, it is a matter of when and to what degree. None will be unscathed, which is why proper negotiation and drafting of a force majeure clause is necessary.

When companies wish to invoke the force majeure provisions of a contract or they receive a force majeure notice from a supplier, it can be very labor-intensive to conduct the necessary contract reviews. Supply chain teams must be able to quickly discern what the provision allows and if the current situation is covered, but for those that have embraced contract analysis technology, there is a silver lining. With a contract analytics platform in place, organizations are better equipped to identify force majeure provisions within their contract portfolios and understand specific obligations to customers and suppliers. Time is of the essence, and depending on how the provision was drafted, contract language may include time stringent reporting protocols and additional disclosure of information, including such things as the number of impacted facilities, when the force majeure event occurred and when it is expected to conclude.

To raise and benefit from a force majeure clause, parties should ask themselves:

  • Is the event in question covered by the clause? I.e. Does the clause apply in cases of delay or only where performance is impossible? 
  • What are the contractual notification requirements? 
  • Does the clause have specific contract language related to business continuity and if so, is force majeure relief still applicable?

Outside of maintaining proper force majeure provisions to protect your supply chain, teams can go a step further to prioritize risk management in any crisis (including, but not limited to, the evolving coronavirus situation). One way to do so is to build an action team and have a contingency plan. The best supply chain teams attempt to foresee risk when possible and have measures in place for when disaster strikes. Consider the following:

  • If a distribution center goes down, for whatever reason, how will orders be fulfilled from customers across warehouses?
  •  Who will be doing what, chains of escalations, and how shortages of supply will be allocated across customers?
  • What are the locations of your first, second and third-tier suppliers and how will you plan for alternate sourcing?

And remember, supply chain implications and planning apply to far more than the ongoing coronavirus (Covid-19) outbreak. Think back to the devastating flooding in Houston, the 2020 Taal Volcano eruption[3] in the Philippines and even the 2010 Iceland volcano eruption; supply chains were affected globally. In all of these cases, cessation of air freight movement as well as closed ports and railways –all key parts of the supply chain—disrupted operations. No one expects these events to occur but when they do, organizations need to be prepared and take proactive steps to mitigate risk.

To learn how Seal Software’s contract analytics platform can assist your organization with understanding your contractual obligations should a force majeure clause be invoked, click here.

[1] MWC Cancellation

[2] Force Majeure definition

[3] Taal Volcano eruption