The global Coronavirus Disease 2019 (“COVID-19” or “coronavirus”) outbreak has caused supply chain disruptions to businesses around the world. From delayed production to halted factory operations and slim shipping and freight options, the coronavirus costs keep mounting for businesses facing huge losses. Developing a cogent response to the outbreak can be extremely challenging, given the scale of the crisis and the rate at which it is evolving. Sheppard Mullin has mobilized a task force to assist clients address potential legal issues that may arise with respect to their supply chain or contracts.

Force Majeure

Supply contracts may contain a “force majeure” or an “act of God” clause that may give rise to a legal basis that excuses a party’s nonperformance under the contract. The concept of force majeure is often used in supply agreements to address unforeseen widespread disruptions in downstream markets. Under certain circumstances, companies may be required to provide a notice or declaration of force majeure within a specified or reasonable period of time. Failure to provide timely notices may result in waiving the force majeure defense.

Recovering Damages

One of the most pertinent problems of the outbreak may be the non-delivery of cargo due to ships and planes being placed into quarantine at an intermediate place of delivery. Buyers and sellers should examine their contracts to ascertain whether they have a claim under the contract for non-delivery or delivery to the wrong destination or a defense to such a claim. It is also important to analyze the potential consequences of a breach, and to understand any existing regulations that require companies to take any steps that may alter or affect contractual obligations. Equally important is the maintenance of clear documentation of any losses your company suffers so that you can support your damages claim should litigation be needed.

Frustration or Hardship

In the absence of a force majeure clause, if an agreement becomes impossible to perform as a consequence of the coronavirus, a party may be able to argue that the purpose of the agreement has been frustrated. For example, the lack of skilled labor, travel restrictions or illness may serve as potential grounds for frustration. However, ascertaining frustration is not always straightforward, and can depend on several nuances such as whether the parties have contractually contemplated the consequences of a force majeure event, or if the frustration of purpose is only due to an unreasonable expense.

What Should You Do?

  • Review your contracts to assess your contractual obligations and
  • Trouble-shoot issues that may develop if your business is not able to comply with its contractual obligations to minimize the consequences of any breach.
  • Analyze how trade agreements may impact or enhance your legal rights. Consider whether you need to defend your rights in court.