COVID-19: Force Majeure in Manufacturing, Distribution, and Retail; and Food and Beverage
Companies in the manufacturing, distribution, and retail sector are analyzing how to best navigate these unprecedented times. The Centers for Disease Control (CDC) and the World Health Organization (WHO) have worked to provide a myriad of informational resources to help companies organize, plan, and tackle the challenges of the current work environment.
COVID-19 may impact employees, supply chains, and consumer demand. Unfortunately, it often is the case that businesses need their employees to show up to work, in factories or warehouses, to deliver products, or to serve retail operations. Companies also have to grapple with potential supply chain issues stemming from insufficient labor to meet their operational needs or delays in delivery. Companies need to ensure that they plan for any disruptions in their workforce and/or their output. Retail establishments need to ensure increased sanitary practices not only for their employees but also for their customers, and ensure they properly communicate the steps they are taking to provide safe environments. For example, we have seen companies in the retail food and beverage business offer to-go only options, increase sanitation practices, and limit operational hours.
A big impact of COVID-19 will be delay—that is, delay in production, delivery, and service. This could mean your company may be in default, it may breach a contractual obligation, or you may be liable for damages for such a breach. In the event that your company is facing disruptions due to COVID-19, the first place you should look is the contract documents you have with your vendors, suppliers, and customers to determine what language, if any, contemplates delays caused by COVID-19.
The most relevant provision that may apply to a viral pandemic is the force majeure clause. Force majeure clauses are common clauses that provide contracting parties with a defense against liability if they are unable to fulfill their contractual obligations due to events that are out of their control and that the parties could not foresee at the time they entered into a contractual agreement. Typical force majeure clauses include acts of God, terrorism, war, extreme weather, labor disputes, etc. They may or may not specify epidemics, pandemics, or quarantines. Courts have generally construed these clauses narrowly, meaning the more specific the parties are about what constitutes a force majeure event, the less likely they will include events not mentioned in the agreement. Even if your contractual language states that a pandemic is covered under force majeure, you still need to determine two additional things: (1) whether COVID-19 was the cause of your delay or other unfulfilled obligation in the contract, and (2) whether COVID-19 was an unforeseeable event at the time of making the contract. For example, if you entered into a contract with a vendor after it was clear that the virus was spreading, it may have been foreseeable that such a pandemic could cause business delays. Before asserting your rights under a force majeure clause, ensure that you take any reasonably accomplished mitigation steps to offset the impact of the COVID-19 disruption.
If your contract does not include force majeure language, you can still look to UCC 2-615 and the common law doctrine of impracticability. Under the Uniform Commercial Code, which is applicable to most contracts involving sales of goods, a party may be excused from performance if such performance is made impracticable by a contingency, the non-occurrence of which was a basic assumption of the contract. In the common law doctrine of impracticability, performance may be excused if a common assumption upon which the contract was made turns out not to be true. Locally, the State of Washington has the power to quarantine individuals and groups of individuals. If Washington asserts that power, you may very well have a legal excuse for delayed performance or non-performance under the UCC or common law. Keep in mind it is best practice to ensure that in the event you are unable to perform an obligation, you exhaust all reasonable alternatives that might allow you to perform the contract with minimal to no delay.
In the event you are unable to find reasonable alternatives, it is important that you communicate with the other party to the contract about your delay in performance. In order to avoid potential anticipatory breach issues, avoid using absolute language in your notice, such as: “We cannot perform.” Instead, be very clear that performance is currently delayed due to the COVID-19 outbreak, that no alternatives allowing you to perform your obligations are reasonably available, and that you will take all reasonable steps necessary to perform within the time frame (if any) stated in the force majeure clause. When sending a notice of delay, refer to the notice provision in your contract to ensure that the notice you are providing to the other party complies with applicable contract requirements. Before sending your notice, we advise reaching out to legal counsel for review.
OSHA requires a safe workplace, and the virus has complicated companies’ ability to comply with the law. It is important to plan, organize, and communicate to both employees and customers all steps that you are taking to provide a safe work environment, and the impacts, if any, to your business. Ensure that you have written plans in place regarding health and safety practices, discrimination, leave, and remote working procedures, and any other policies applicable to your business. Due to the complex nature of employment law, we strongly suggest you work with employment legal counsel to ensure your company has taken the steps necessary to comply with the law.