The coronavirus continues to ensnare China and the rest of the world as the number of reported cases grows daily. In response to this crisis, millions of Chinese workers remain quarantined and many auto supply chain plants remain closed. The effect this is beginning to have on the U.S. auto supply chain has been well-documented. As a result, auto suppliers are beginning to evaluate their legal options for protection from potential shutdowns, including turning to force majeure.
Force majeure, which is a French phrase, interpreted means a “superior force.” Sometimes referred to as an “act of God,” force majeure is most often invoked in response to natural disasters, such as hurricanes or tornados. A force majeure event can legally excuse a party’s performance in whole or in part, protecting that party from a breach claim.
To determine whether an event qualifies as a force majeure event, suppliers should start with the language of their contractual force majeure provisions. OEMs and Tier 1 suppliers nearly all have force majeure provisions in their standard terms and conditions. Under Michigan law, there is no one-size-fits-all definition for a force majeure event. Instead, Michigan courts interpret force majeure provisions like any other contract provision: according to the provision’s plain terms, but with the added policy of interpreting force majeure provisions narrowly. This means courts are not to apply a force majeure provision unless the event at issue is specifically identified in the contract.
Suppliers should closely scrutinize their force majeure provisions to determine whether non-weather related events like coronavirus might be covered. Other specific provisions to note are whether certain forms of notice are required, whether the occurrence of a force majeure event might give rise to termination rights, and whether suppliers are required to maintain any type of buffer stock of parts.
In lieu of an express contractual force majeure provision, suppliers might also look to the Uniform Commercial Code, which may act as a gap-filler. Like a force majeure clause, the UCC may excuse performance if delivery has been made impracticable by an event the non-occurrence of which was a basic assumption of both parties when forming the contract. Under this section of the UCC, which is broader than most contractual force majeure provisions, the question tends to be less whether an event like coronavirus is covered, but whether performance is truly impracticable. If, for example, there are alternatives to performance that are simply more expensive, a court may find that performance was not actually made completely impracticable. Suppliers should consider whether alternate supply sources can be arranged, or whether other stop-gap measures are possible, such as expedited freight. If so, then suppliers are likely expected to take advantage of these options, and sort out cost responsibility with their customers later on.
The coronavirus threat does not appear to be going away any time soon. Warner attorneys are closely monitoring the situation and can help suppliers review their force majeure options, including their terms and conditions to prepare for potential supply disruptions, and evaluate allocation of supply demands as plants start to get back up and running. We can also help suppliers deal with force majeure notices from their supply base. With the way the coronavirus is spreading, suppliers can't be too careful. Upfront planning and clear, consistent communication are required so that everyone's expectations are understood from the start.