The outbreak of coronavirus has caused disruption to supply chains around the world, but what happens if you or your supplier can no longer meet contractual obligations?
If a firm has been impacted by an event outside its control, contract laws in many countries include force majeure provisions which will help them to avoid liability, David Lowe, partner at law firm Gowling WLG told SM.
“If a Chinese supplier has a factory in Wuhan that has been closed due to direction from the Chinese government because of the virus, that could well be a force majeure. Coronavirus and government action is not in the control of the supplier nor could it be anticipated,” he said.
Lowe added firms must communicate any supply issues to their customers and demonstrate they are trying to work around the issue, for example, sourcing supplies from an alternative factory.
“If you cannot fulfil your customer contracts because your Chinese supplier cannot supply, you might be able to call force majeure but you will still need to try and source the components from an alternative supplier. You cannot sit on your hands and do nothing,” he warned.
Difficulties may arise in the instance of a fixed-price contract, where the force majeure has made supplies more expensive. “Courts often expect a party to absorb some of the extra expense,” Lowe said but this will depend on the specific situation.
Another difficult position firms may face is when it is possible to perform, but they may not want to.
“If you had a conference in Milan, you might not want to attend it. But the UK's Foreign Office is not advising against travel to Milan, so it will be difficult to cancel, call it a force majeure and get your conference fee refunded,” Lowe said.
Coronavirus may not be a force majeure event for new contracts as it’s global impact has been well documented and it is now possible to anticipate its impact on supply chains.
In this example, Lowe advised: “You need to make sure you are contracting on the basis of what can reasonably be anticipated on coronavirus and adjust pricing, delivery times and level of committed orders. For your most valuable or strategic contracts, you may need to build in specific wording on coronavirus.”
The outbreak of coronavirus has led to household products such as hand soap, hand sanitiser and toilet roll to sell out.
☛ Want to stay up to date with the news? Sign up to our daily bulletin.