Many businesses are already experiencing raw material shortages related to the coronavirus. As the virus and the related quarantines spread, most businesses are likely to experience material and labor shortages that will affect their ability to service their customers. Depending on the relevant contracts and relevant law, those businesses may be excused from performance.
Under common law, which typically governs the performance of services, a party is typically excused where its performance is prevented by some event outside its control (often called a force majeure event). Under the Uniform Commercial Code, which typically governs the supply of goods, a party is similarly typically excused where its performance has become commercially impractical. However, specific steps should be taken in these circumstances to ensure relevant legal protections are available.
Below are a number of steps you should take if the coronavirus disrupts, or you anticipate that it will disrupt, your ability to provide goods or services to your customers:
- Review Business Continuity Plans: Business continuity plans are adopted in advance of a crisis to help you think through your options during a crisis. Now is the time to review those plans so that you can act quickly when needed. It is possible that your business continuity plans do not contemplate a global pandemic, but they might still be helpful. If you have not yet experienced a disruption, now is a good time to update such plans to address the issues associated with the coronavirus.
- Mitigate Negative Impacts: No matter what protections you might have under relevant law or relevant contracts, you need to do whatever you can to mitigate negative impacts. Your customers will expect you to do so, and, in any case, you might not be entitled to force majeure protection if you did not act reasonably to mitigate negative consequences. So, try to find alternate sources of supply and/or labor, consider whether you can shift production to areas not affected by the coronavirus, and be wise with your existing raw materials and inventory.
- Review Supplier Contracts: You should be in constant contact with your suppliers right now to understand which suppliers are expecting disruptions related to the coronavirus. If you anticipate that certain suppliers might have trouble performing, review your contracts with such suppliers. First, review such contracts to determine whether they allow you to increase your purchases from such suppliers, or purchase similar goods or services from another supplier, prior to a force majeure event in order to build up inventory. Second, review such contracts to determine whether any such suppliers have business continuity obligations that you should point out to them. Depending on the governing law, you might be entitled to demand that the supplier provide adequate assurance that they will be able to perform, even if such a right is not expressly stated in the contract. If a supplier is claiming force majeure protection or is otherwise not performing in connection with the coronavirus, you should typically have the right, regardless of whether expressly stated in the contract, to buy from another source.
- Review Customer Contracts: Review your customer-facing contracts that might be affected. First, you should review to determine whether any customer contracts require that you favor that customer over other customers in a shortage. Some contracts require that you prioritize a certain customer or class of customers (such as all customers with a supply contract) over other customers. Second, you should review to determine whether any contracts require that you notify the customer of a potential force majeure event within a certain amount of time in order to claim force majeure protection. If a contract requires notice within a certain period of time, it is important that you send such notice within the allotted time. Given the gradual build-up in problems associated with the coronavirus (as opposed to a sudden event like an earthquake), it may be unclear exactly when the force majeure event started. Therefore, it is crucial that you send notice to your customer sooner rather than later if you might need to claim force majeure protection. You should be sure to send such notices in accordance with the formal notice requirements set forth in the contract. Note that most force majeure provisions do not expressly contemplate a pandemic, so you may need to claim force majeure protection under another allowable theory, such as (if applicable) a shortage of supply or labor or the declaration of a national emergency. IMPORTANT NOTE: Typically, an increase in the cost of raw materials or labor does not entitle a party to force majeure protection unless the language in the contract clearly states otherwise. Furthermore, some force majeure provisions distinguish between a shortage of raw materials and a shortage of labor, so it is important to read the force majeure provision carefully in light of your specific situation. Finally, you should review your customer contracts for other requirements associated with a force majeure event, such as requirements to follow previously agreed upon business continuity plans.
- Deal with “No-Contract” Customers: Your relationship with customers with which you do not have a contract may be governed by a battle of the forms situation or by relevant law. A battle of the forms situation arises when the parties have swapped various documents such as quotes and purchase orders, each including or referencing general terms and conditions. If the parties have not swapped terms and conditions, relevant law would provide the terms and conditions. In any of these cases, you may need legal input to determine what force majeure rules apply. Typically, relevant law will require that you notify affected customers within a reasonable amount of time, and that you allocate capacity in a fair and reasonable manner. However, the specifics may vary widely by governing law so you should seek legal input.
- Address No Force Majeure Protection: It is also conceivable that you might not be entitled to force majeure protection in connection with the coronavirus. If you believe that you might have trouble performing on a contract and might not be entitled to force majeure protection, you should immediately advise legal counsel. You will still need to take most of the steps outlined above, but you might need to take additional steps as well, such as notifying insurance carriers of a potential breach of contract claim.
Ms. Hilary Atkins - General Counsel & Sr. VP, Finance and Administration, ACCA