Supply chain and force majeure disputes in the COVID-19 era

The COVID-19 pandemic has disrupted supply chains, created delays and disruption, and caused businesses worldwide to consider invoking force majeure.

Addressing COVID-19-related challenges, risks, and disputes

The COVID-19 pandemic has disrupted supply chains, created delays and disruption, and caused businesses worldwide to consider invoking force majeure. The magnitude and complexity of supply chain problems created in the wake of COVID-19 are unprecedented in the modern era. To navigate this crisis, businesses need to assess risk, consider pragmatic and tailored solutions, and act promptly to mitigate damage and safeguard vital business functions.

Supply chain challenges and key considerations

Covid-19 is a stress test for many supply chains and is likely to create severe disruptions across most industries around the globe.  Global supply chains are multi-layered and complex, leading to situations where disruption can be unexpected or poorly understood.  When faced with potential or actual supply chain disruptions, here are key points to consider:

  • Make sure you understand the relationships along your supply chain to minimize unexpected disruptions; to the extent feasible and within the limits of regulatory guidelines collect and organize all contracts and key documents relating to the supply chain including sub-contracts.
  • Evaluate your legal options based on the contracts in place: determine governing law; evaluate force majeure provisions (discussed below); consider whether frustration of purpose or impossibility arguments are relevant; analyze whether (price or performance) adjustment options are available under the contract or governing law; and identify options for relief such as seeking a court injunction when necessary.
  • Be practical.  Keep in mind that business relationships often will need to be continued after the disruption passes.  Look for negotiated resolutions such as price or timing adjustments modified to account for the disruption and any changed circumstances.  However, also consider whether it is possible to take over sub-contracts or use alternative options.  Consider whether an insurance claim is available either by you or by your counterparty (potentially for your benefit).
  • Prepare for the future.  All parties should look to define their rights and obligations with greater specificity going forward.  When possible, identify and agree on dates for resumption of supplies and services and whether resumption will be gradual.  Consider whether contracts should be amended to address risk of future pandemics specifically such as through price adjustments, liquidated damages, additional insurance or other mechanisms.
  • Our Supply chain disruption tool can get you started in evaluating your current risk in various industries.

In today’s business landscape, supply chain disruption challenges are inextricably bound with issues of force majeure. Companies need to carefully examine their contracts and force majeure clauses, as well as understand the relevant governing laws, to determine in what circumstances force majeure may apply.

Breach of contract and force majeure: key questions when crafting a strategy

The COVID-19 virus and related events have severely hampered parties’ ability to perform under their commercial contracts. Force majeure provisions, which may allow a party to suspend its obligations to perform without incurring liability, are more important than ever.

The question of whether a party is excused from performing under an agreement because of force majeure boils down to basic contract interpretation and breach of contract principles. In considering the applicability of a force majeure clause, often asserted as a defense to a breach of contract claim, courts generally focus on key issues that companies must address:

  • Does the event qualify as force majeure under the contract language?
  • Was the risk of nonperformance foreseeable and able to be mitigated?
  • Did the force majeure event cause the resultant non-performance?
  • Was performance truly impossible, or at least prohibitively difficult, such that the event frustrated a party’s ability to perform? (Impracticability or inconvenience is not enough.)

The merits of a force majeure defense will be based on the particular facts underlying the inability to perform; not simply the onset of a major catastrophe, man-made or otherwise.

How we can help

For more information or if you have specific questions, please reach out to any of the lawyers above or your primary Hogan Lovells contacts. 

Hogan Lovells lawyers across the globe help clients with supply chain disruptions every day. In the first place, we help clients assess whether they have a force majeure event and what its consequences are. We work with you to evaluate options and develop strategies to minimize risk of supply chain disruptions. When disputes arise, we protect your rights and your business, seeking to insure your continued operations and business success.

 

 

Authored by Robert B. Wolinsky, Maria Wyckoff Boyce, Christopher J. Cox, Laurent Gouiffès, Dr. Detlef Hass, and Kaitlyn Golden.

 

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