As the coronavirus continues to wreak havoc globally, long-term business implications are imminent for US companies
The fashion and retail industries are specifically affected due to the volume of goods produced in China, the epicenter of the outbreak. Chinese suppliers’ ability to perform under supply contracts and brands’ ability to launch new collections are in question as an increasing number of Chinese factories, storefronts, and companies close their doors to stop the spread of the virus.
The Problem Retail Is Facing
Many Chinese manufacturers have warned that they will be unable to fulfill spring collection deliverables until late summer due to the epidemic. This late delivery will not only affect wholesale orders but individual customer orders, raising a myriad of issues. So what do companies need to do to protect themselves?
With approximately 700 million factory workers in China ordered to stay home from work, Chinese production has come to a halt, making it impossible for Chinese suppliers to comply with their contractual duties. These suppliers are pointing to force majeure provisions in their supply contracts to excuse their non-performance. Force majeure provisions typically excuse non-performance due to events outside of a contracting party’s reasonable control, but may not specifically include epidemics as a force majeure event. Whether the coronavirus outbreak is a force majeure event under any supply contract will depend on the governing law of such a contract and the specific terms of the force majeure provision.
Chinese suppliers invoking force majeure clauses are, in effect, attempting to defer fulfillment requirements to US retail companies. This leaves US retailers with three options: agree the coronavirus is a force majeure event and incur the costs of deferred order fulfillment; dispute that the coronavirus is a force majeure event under the dispute resolution provisions of the supply contract, which dispute will take time to resolve and, even if a judgment is awarded in the retailer’s favor, enforcing the judgment will be difficult; or negotiate a compromise. Such a compromise may include temporarily rerouting orders through other countries less affected by the outbreak, such as Turkey and Vietnam, negotiating to be the first retailer to receive orders once business resumes, or covering the cost of delay through the supplier’s insurance.
In addition, US retail companies may want to consider:
- Invoking applicable force majeure provisions to permit cancellation of spring orders;
- Reviewing contracts with wholesalers to determine options for credit and payments for upcoming lines and launches;
- Tendering a claim to their provider of business interruption insurance, which may cover losses caused by the epidemic; and
- Negotiating force majeure provisions going forward to mitigate these risks in the future.
Inability to Fill Customer Orders
US retailers also need to closely monitor their product inventories to make sure that deferred fulfillment does not result in a violation of the Federal Trade Commission’s Mail, Internet, or Telephone Order Merchandise Rule (the Mail Order Rule).
The Mail Order Rule prohibits companies from accepting Internet, mail, or phone orders unless they have a reasonable basis to expect that they can ship the ordered merchandise within the time stated when the order was accepted or, if no time is stated, within 30 days. If the items are going to be delayed (regardless of the reason), the Mail Order Rule requires sellers to seek the buyer’s consent to the delayed shipment. If the buyer does not consent to the delay, the seller must offer a prompt refund. The Mail Order Rule requires consumer notifications of shipping delays and can, in some instances, require refunds to be given. Affected retailers should adjust the shipping times given to consumers commensurate with current product inventory to avoid the process of having to notify customers of delays and seeking their consent. If a retailer discovers that it has already accepted orders that it cannot ship on time, it should have a communication plan in place to notify customers and seek their consent to the delay per the requirements of the Mail Order Rule.