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Coronavirus and Global Supply: Contractual Protections Can Be a Remedy to the Symptoms from Unhealthy Supply Chains

The outbreak of coronavirus in China has made front page news across the globe in the past month and, while this epidemic has brought about health concerns for individuals around the world, industry concerns have arisen for those buying goods or component parts from the Chinese market. Specifically, when supply chains are interrupted and inventory is short, companies relying on goods supplied from China are wondering where to turn as they face production limitations or, in some cases, line shutdown, impacting downstream commerce. Where companies face these concerns brought about by supply shortages and remedies are required, companies must look first to the language of their supply agreements.

First, where a supply agreement contains a force majeure provision (or Act of God provision), the contract language itself may provide options and legal remedies when the production and sale of one's goods becomes commercially impractical or, in some cases, even impossible. Specifically, the invocation of such provision may permit adjustments to the contract's primary terms including: delivery; quantity terms; and, in rare situations, the agreed upon purchase price. These force majeure provisions allow contracting parties the opportunity to address supply disruption where unexpected circumstances prevent a party from performing. Should you find yourself in a position where supply is short and your contract contains a force majeure provision, it may be time for a supplier to provide notice to its buyer.

Even in the absence of a force majeure provision, legal protection may still be available that will excuse non-performance due to commercial impracticability. In this situation, the Uniform Commercial Code (UCC) protects a non-performing party from breach under UCC § 2-615. A party may seek baseline protections for the party's non-performance where "performance as agreed has been made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption on which the contract was made . . . ."[1] Put differently, a seller is excused where its performance is "commercially impracticable because of unforeseen supervening circumstances not within the contemplation of the parties at the time of contracting."[2] Notably, where a seller's ability to supply is only partially impacted, the seller must allocate production/supply among its customers in a fair and reasonable manner.[3] There remain additional factors that must be considered such as burden of proof, foreseeability, duration, etc., and increased costs alone may not be sufficient to meet the burden of proof.

Therefore, where a company is experiencing supply shortages due to the coronavirus's shutdown of commercial facilities in China, the coronavirus likely qualifies to excuse performance under either a supply contract's force majeure provision or under the UCC.

Should your company find itself in this position where it is difficult to maintain inventory levels or produce parts due to lack of supply from a Chinese supplier, it may be time to consider the invocation of force majeure protections under your supply contracts or under the UCC if such force majeure provisions are missing from your contracts. 

[1] UCC § 2-615(a).
[2] UCC § 2-615, Official Comment 1.
[3] UCC § 2-615(b).

© 2020 Varnum LLPNational Law Review, Volume X, Number 51

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About this Author

Ethan Beswick Business Attorney Varnum Law Firm
Associate

Ethan Beswick is an associate attorney with a business and corporate service practice and additional experience in tax, real estate and aircraft matters. He provides general business and transactional work and has experience in mergers and acquisitions, business transactions, financing, contracts, and day-to-day business issues.

Ethan also works regularly with business tax, international tax, and other tax related issues, and assists clients with real estate sales and acquisitions, commercial leasing matters, and real estate financing transactions.

 An instrument-rated...

616-336-6931
Brion Doyle, Litigation attorney, Varnum
Partner

Brion is a member of the Litigation Practice Team. He is experienced in commercial and environmental litigation in state and federal court. Brion has represented clients in a wide range of commercial and tort cases including class action defense, products liability defense, personal injury defense, commercial contract disputes, covenants not to compete, embezzlement and bank fraud actions, minority shareholder disputes, and in collection and creditors’ rights litigation. He has handled all forms of alternative dispute resolution, including facilitative mediation, arbitration and case evaluation under the Michigan Court Rules.

Brion is also a member of Varnum’s E-Discovery Task Force, where he advises clients on matters relating to the preservation and production of electronically-stored information, as well as best practices for companies in retaining data. 

616-336-6479
Scott Hill, Corporate attorney, Varnum
Partner

Scott is a partner and the leader of Varnum's Corporate Practice Team. His practice focuses on business representation, including transactions, planning and counseling. Specifically, Scott deals with acquisitions, sales, mergers, succession planning, private equity, financing and joint ventures on a variety of levels. He also spends a significant portion of his time counseling clients on supply chain contracting issues.

616-336-6929