The Force of Force Majeure in Supply Chain Contracts

Hanson Bridgett LLP
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Hanson Bridgett LLP

In the turmoil of adjusting and living day-to-day in this time of the COVID-19 virus, the public has become more attuned to the reality of the term “Supply Chain.” We are gaining a better appreciation that before products reach the consumer, an extensive network of shippers and transportation entities of all types and modes of commerce, as well as freight brokers and any other functions essential to the delivery cycle, are at play 24/7.

With few exceptions, these participating businesses interact with each other through a comprehensive network of contracts, up and down the supply chain. Like any other service contract, the contractual link between the parties in the shipment of goods includes traditional Force Majeure terms and conditions, which are now severely tested given that attempts to address and defend against COVID-19 have significantly disrupted the movement of goods from start to finish.

The adverse consequences of delayed deliveries, freight claims for loss and damage, stolen goods, shortages, cash flow issues, disruptions in equipment resources, diminished driver resources, and other disruptions to the overall transportation industry have caused failed performance and other defaults. This has resulted in a greater number of actual or threatened litigation or, alternatively, arbitrations. In either forum, the defendants are now dusting off Force Majeure clauses as a defense to claims of failure to perform.

This historic barrier to liability is often taken for granted until a crisis arises. It is not limited to only participants in the transportation universe. Instead, it has a global application in all sectors of business. Essentially, the standard Force Majeure clause excuses performance based on extraordinary conditions beyond the control of either party to an agreement, the most common of which is the Act of God defense. Emerging lawsuits will test whether COVID-19 falls within this defensive category, although most commentators believe it will subject, of course, to the particular circumstances of any dispute. Certainly, this is true for shippers and carriers alike. Steamship companies have already made clear that they will rely on Force Majeure to defend against delayed delivery to domestic and international ports. Likewise, carriers of perishable products have asserted the defense against delayed delivery claims of products that arrive adulterated and unusable for other purposes related to the transportation function.

At the same time, and consistent with many other ongoing or revised contract negotiations, the parties thereto are paying closer attention to defining the term more precisely and in tune with the virus. For example, the word “pandemic” is now being added to the list of “traditional” Force Majeure events to avoid any contention that the Act of God defense may not cover what we are experiencing in today’s world situation.

Of course, a Force Majeure defense is not necessarily foolproof. Exceptions to the defense become relevant to overcome, or at least, minimize the end-result of a catastrophic event or condition such as COVID-19. In the end, and notwithstanding the challenges presented by the virus environment in which we are currently living, freight is moving successfully through the supply chain for which we can all be thankful to the men and women in this dynamic and essential industry.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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