Is Your Contract Virus-Proof?

Dykema is closely monitoring the potential threat of legal fallouts in the wake of supply chain disruption caused by the novel Coronavirus (also known as COVID-19). In the last month, companies reliant on the global supply chain have been faced with part shortages and overall supply chain disruption. Production facility shutdowns as well as halted transportation, primarily in China, are the main causes of these issues. As the virus spreads, it is expected that facilities and transportation in other countries will be impacted as they seek to contain the virus.

Practically speaking, your company should mitigate business risks caused by current and anticipated supply chain disruption, including: 1) obtaining up-to-date production information on all players in your global supply chain, both upstream and downstream; and 2) making arrangements to secure alternative parts and materials to ensure continuity of supply where possible. However, in addition to addressing these essentials, don’t forget to check your contracts and insurance policies, including:

• Insurance policy claim requirements,
• Tender of liability rights and obligations, and
• Force majeure clauses.

Indeed, it is imperative that companies start evaluating contract language on the above topics now. These rights may impact whether your company can transfer, allocate, or potentially avoid substantial costs and liability, even after the crisis is abated.

Tender Notices and Insurance Policies

Manufacturers and suppliers should evaluate contract language to assess whether the Coronavirus triggers the right to tender costs or liability to third parties. Further, insurance policies, and in particular business disruption policies, need to be reviewed to determine whether claims may be made for loss of revenue related to the virus. Waiting until after the crisis is over, even for only a few weeks, can result in a legal waiver of important contract and insurance rights.

Force Majeure Notices

In addition to sending tender notices and making insurance claims, a primary contract issue that must be addressed is the declaration of force majeure by some suppliers. Some companies are asserting that supply chain disruption caused by the Coronavirus constitutes a force majeure event or gives rise to a legal basis excusing contract nonperformance under the Uniform Commercial Code (“UCC”).

On receipt of such a notice, the main question to ask is whether the spread of the virus constitutes a force majeure event. French Finance Minister Bruno Le Maire thinks so; stating that the country will consider the Coronavirus a case of force majeure. Putting such extra-contractual declarations aside, when your company receives a force majeure notice, the first step should be to review applicable contracts to determine how a force majeure event is defined therein. That definition most likely will govern. The same applies to impacted suppliers; if your company is unable to meet supply obligations, you should review contract language when deciding whether to issue force majeure notices. If the spread of the virus constitutes a force majeure event under the contract language, that may give impacted suppliers a legal excuse to avoid liability for the failure to meet obligations. If your contracts do not define force majeure, most customers and manufacturers of goods operating under United States law will be subject to the UCC’s language in Section 2-615, and interpreting case law, discussing what constitutes commercial impracticability excusing supply performance.

The second step upon receipt of a force majeure notice is to ensure your company sends a quick response. Under the UCC, you must respond to a notice within 30 days—maximum—which time period could be shorter on a case by case basis. The response should include your company’s position on whether the outbreak legally excuses the supplier’s performance. Also, be sure that your company reserves all rights in its response. Some additional options available upon receipt of a force majeure notice include: 1) terminating the contracts; or 2) agreeing to take an allocation of supply, if available and offered. Specific contract terms may have other options, timing or require other actions that must be considered.

While most companies are focused on mitigating business risks resulting from the Coronavirus, it is important to ensure that your company has a team tasked to send or respond to force majeure notices and to assess contracts and insurance policies for opportunities to tender, shift or avoid costs and liability. Without these processes in place, your company risks waiving important legal rights and losing the ability to recover substantial costs resulting from the virus.

For more information on these topics, please contact Laura Baucus (248-203-0796 or lbaucus@dykema.com), or your Dykema relationship attorney.