Contract killer: The clause breaking supply chains apart

By Subir Ghosh

On March 22, the Sunday Times newspaper reported about Irish retail giant Primark cancelling all supplier orders that were yet to reach its distribution centres. The company, which has no online sales and is owned by Associated British Foods Plc, was reported to be using a force majeure clause in its contracts to cancel the orders.

Around the same time, many other brands and retailers in North America and Europe too cancelled orders along similar lines, leading to a public outcry over the issue. As reports of order cancellations keep pouring in, breaking apart entire supply chains across industries, an established contractual principle that few ever cared to read twice has since been dominating the discourse.

Force majeure (meaning “superior force”) is a common clause in contracts that frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties occurs. These events can range from a war, strike or riot to an epidemic or an event described by the legal term act of “God” (hurricane, flood, earthquake, volcanic eruption, etc).

Though the force majeure provision is reserved for serious unforeseeable events that rarely occur, whether one can wriggle out of an obligation using this clause depends on how those terms are factored into a contract. Every contract might be differently worded.

Force majeure in the current context

The current crisis, which was first caused and then exacerbated by the ever-spreading COVID-19 pandemic, started as a set of apparently one-off events around February. Even though the disease outbreak was still a month away from being declared a pandemic by the World Health Organization (WHO), there were event organisers who could see it coming. A number of trade events related to this industry were either cancelled or deferred. Many of them were said to have been cancelled or deferred using the force majeure clause.

Therein is a point that lies in the danger of being drowned in the noise generated by the outcry over order cancellations by brands and retailers—the force majeure clause is not specific to contracts between brands and apparel manufacturers; it exists across the system and is being resorted to around the world and in all circumstances where a deal can no longer be honoured.

In March itself, the financially-beleaguered Debenhams retail chain fell back on force majeure while asking its landlords in various cities for a five-month rent holiday. As the retail sector takes a beating both with near-zero footfalls, piling stocks and salary obligations, shop owners all over have only that one clause to find succour in. The Debenhams case is itself a classic example of how retailers find themselves in a real estate quandary. Only a year back, the company which started as a draper’s store in 1778, was seen to be paying too much rent. Its annual rent bill was around £300 million, or roughly 13 per cent of its annual turnover. Debenhams had other issues as a company, but the rent aspect would ring true for many retailers everywhere. But that is another story.

Logistics is one sector that joins all components of a supply chain. Big logistics companies have already invoked force majeure clauses. On March 20, DHL Global Forwarding cited force majeure. In an emailed statement to a supply chain portal, a Deutsche Post DHL Group spokesperson said, “With almost all elements of the air and ocean supply chain on certain trade lanes currently being impossible to predict or control, DHL Global Forwarding decided to declare force majeure and to reserve the right to modify its services to the prevailing circumstances consequent to the virus.”

Switzerland-based CEVA Logistics said it “reserves the right to modify all or part of its services, to change its working procedures and any previously agreed rates and prices, to levy surcharges, or otherwise to take any measures necessary to adjust its business operations and its obligations to its customers, suppliers and other stakeholders, in response to the prevailing circumstances.”

Naturally, shipping is affected too. On March 24, the Indian ministry of shipping asked all 11 major port trusts in the country “to consider COVID-19 pandemic as a valid ground for invoking force majeure clause on port activities and port operations also, in as much as obligations under various contracts (involving the major port trusts) are concerned”, to deal with the difficulties faced by stakeholders. On April 6, the Kolkata Port Trust became the first state-owned port trust to invoke the clause (at its Haldia Dock Complex). Many other ports had already declared force majeure. If the shipping industry gets afflicted by a widespread usage of force majeure, it could throw logistics in disarray, something that might later need months to put together again.

The necessity of avoiding force majeure to the extent possible

Nevertheless, most order cancellations or contract terminations/postponements pertain to brands/retailers and apparel exporters. Big companies have come in for criticism for using force majeure clauses to renege on orders. The Ethical Trade Initiative (ETI), a London-headquartered alliance of companies, trade unions and NGOs that promotes respect for workers’ rights around the globe, recently issued a guidance urging dialogue with suppliers over ongoing orders and collective action on long-term social protection for workers.

Its executive director Peter McAllister specifically referred to the force majeure angle. He said, “Payment for completed orders should be honoured and within reasonable time. Brands should consider early payment and not withhold payments to suppliers as workers need money for medication, food or to survive periods of isolation. Brands should also avoid using force majeure provisions in contracts for economic reasons or summarily terminating contracts. Brands are asked to work with their suppliers to ensure workers continue to receive salary payments to bridge the time of technical unemployment and work with suppliers to ensure that workers receive compensation packages in line with national and international standards.”

The International Textile Manufacturers Federation (ITMF), which on Monday announced that orders are down 32 per cent globally, too has urged stakeholders in the supply chain to work closely together. "Above all, ITMF is asking retailers and brands to refrain from making use of any ‘force majeure clauses’ in their contracts with suppliers. These would lead to a cascade of cancellations of orders that are ready for shipment or in the process of completion. Instead, brands and retailers as well as all other stakeholders in the supply chain should have dialogues and look for creative solutions that allow partners to survive this unprecedented period together," it said.

“While the supply chain is certainly disrupted dramatically, all stakeholders should do their part not to destroy it. If otherwise healthy companies go under because of insufficient numbers of orders and/or a lack of liquidity, the supply chain will not be capable to produce the necessary number of products with the necessary quality and speed once demand is returning,” the ITMF said.

Fibre2Fashion News Desk (RKS)