Coronavirus (COVID-19), Force Majeure and the Supply Chain
When the coronavirus (COVID-19) first caused global alarm with government-mandated shutdowns, travel holds and mandatory evacuations, companies were scrambling to review their supply chain and prepare to address disruptions to critical supply lines. Over the last 7 months, we’ve seen the cancellation of all in-person events. Just to cite one example, Mobile World Congress (MWC) event organizers, GMSA made the cancellation announcement just two weeks before doors were set to open. As part of that, the GMSA had 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. While force majeure provisions can vary greatly depending on the contract language used, they typically cover several event types 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, sourcing, procurement and commercial managers need to manage risk at scale. In times of disaster, it’s not a question of if the supply chain will be impacted, it’s 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 have to quickly discern what the provision allows and if the current situation is covered, but for those that have embraced contract analysis technology, there’s 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 the number of impacted facilities, when the force majeure event occurred and when it’s 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? In other words, 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 continuing 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 handle chains of escalations, and how will supply shortages 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 COVID-19 outbreak. Think back to the devastating flooding in Houston, the 2020 Taal Volcano eruption in the Philippines and even the 2010 Iceland volcano eruption. Supply chains were affected globally. In all 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.
Visit the DocuSign Insight product page to learn more about how we can help your organization understand your contractual obligations should a force majeure clause be invoked.