Force majeure: a new dimension to the coronavirus outbreak

2/25/2020

With production and logistics operations across China gradually resuming, supply chain managers across industries like automotive, machinery, and chemicals may soon face a new risk dimension pertaining to the coronavirus: suppliers or buyers invoking force majeure, according to the latest update by DHL’s Resilience 360 supply chain risk management platform on the impact of the outbreak published yesterday.

As authorities seek to provide financial and legal support to companies struggling with the coronavirus fallout, the China Council for the Promotion of International Trade (CCPIT) has already issued force majeure certificates to 1,615 companies covering 30 sectors and a total contract value of RMB 109.9 billion (US$ 15.7 billion; €14.5 billion) until 16 February, it said.

These certificates shield companies from legal and financial damages arising from not performing or only partially performing contractual duties, such as delivering, transporting, or taking cargo, by proving that they are experiencing circumstances beyond their control.

Typically, force majeure is invoked during natural disasters but can also apply in the event of unforeseen acts of government such as the government-mandated lockdowns and production stoppages in the wake of the coronavirus outbreak.

“Although only a small number of companies have so far received such certificates, the numbers could quickly rise in the coming weeks as more companies realize that they cannot deliver or receive cargo due to labour shortages and logistics challenges even though they are allowed to resume operations,”  Resilience 360 noted.

As a consequence, trade relationships with Chinese or foreign companies operating in China could become entangled in legal and financial disputes which may either be solved by an independent arbitration body or through a negotiated compromise. This could take several months due to the constantly changing regulatory environment in China,  it warned.

“What makes the topic of force majeures even more significant is that both its use and its consequences are likely to hit the supplier and the buyer at the same time. For instance, a car manufacturer in China or abroad may have to deal with Supplier A invoking force majeure due to its inability to deliver parts, which prevents the car maker from producing its end product as no alternatives are available in the short term.

“Major OEMs such as BMW, Daimler, and Fiat Chrysler as well as Toyota, Nissan, and Hyundai have all halted production in China and some in their domestic markets. The car maker is then likely to invoke force majeure on its own for component deliveries from Supplier B which is still able to produce and deliver, since these components are of little value due to the car maker’s production lines being down,” it added.

“Original analysis” of Chinese-language documents by Resilience360 shows that force majeure certificates were delivered to companies in different Chinese provinces across various sectors, including in the chemical, automotive, medical devices, and electronics sectors.

Most of these certificates concern companies in the machinery sector (almost 33% of the total) that produce tunneling and mining equipment as well as machines for lithium battery production and printing, among others. Companies in the retail sector that produce, distribute, or export apparel products, gifts or accessories account for 15% of the recipients of such certificates.