Fashion and retail entities – from large luxury houses to independently-owned brands – are grappling with how to best navigate their new reality as COVID-19 continues to spread. For many, this means “potential supply chain issues stemming from insufficient labor or materials to meet their operational needs.” It also means delays in delivery. And still yet, the impact of the virus is likely to take the form of sweeping inventory inconsistencies, meaning that brands and retailers are either stuck with greater-than-usual product volumes due to store closures and a drop in non-essential shopping or highly diminished stock due to increased demand. Both scenarios stand to harm brands and retailers from a bottom line perspective.
From a manufacturing perspective, the fashion industry is being hit especially hard due to its reliance on Chinese manufacturers as key parties in the supply chain. While Chinese factories are, in fact, beginning to reopen and churn out products again, they are, nonetheless, coming off of weeks of temporary closures and layoffs, which have made their ability to make good on their contracts difficult, if not impossible, in no small number of cases.
“Since many apparel companies experienced shipment delays when Chinese factories did not recover for weeks due to COVID-19 concerns, spring [product rollouts were] somewhat delayed already,” Retail Dive stated recently, noting that brands/retailers’ timetables for the rest of the year are being pushed back. For instance, the status of brands’ spring and summer merchandise, along with planned replenishments, is almost certainly influx in most cases. “It has likely just arrived, is [in transit] or is about to arrive,” Jon Gold, VP for supply chain and customs policy at the National Retail Federation, told the publication. “Late summer and back-to-school merchandise,” he says, “is only just in production now.”
“Retailers and wholesalers can’t shift orders back neatly like a meeting on a digital calendar,” says Retail Dive. “Product development and delivery schedules are complex, as is the warehouse space to accommodate them.”
With such scenarios in mind, delay is proving to be one of the major impacts of the global COVID-19 outbreak – from the timing of manufacturing to hold ups further down the line in terms of delivery, according to Schwabe, Williamson & Wyatt’s Michael Herbst. And such delays – which are being cited as generally taking the form of pushback of two or three months on the delivery of collections that are supposed to hit stores now – “could mean that your company may breach a contractual obligation, and may be liable for damages for such a breach,” Herbst says.
These hard supply-related realities – and the contract issues that could abound as a result – do not just go one way. In other words, liability is not merely a prospect for the manufacturers, who are weeks behind schedule; it also exists for brands, themselves, which maintain often iron-clad contracts with the retailers that stock their wares and expect to receive them by a certain date and for a certain price.
“In the event that your company is facing disruptions due to COVID-19,” Herbst says that “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 events, such as COVID-19.” Force majeure provisions – ones that enable a party to be relieved from liability for non-performance if circumstances beyond the party’s control prevent the party from fulfilling its obligations under a contract – are particularly relevant.
While the applicability and the extent of the terms of any force majeure provisions will depend on a number of factors, including jurisdiction, and must be approached on a case-by-case basis, from a general perspective, force majeure clauses have typically been found to apply in connection with “acts of God” (which have been defined as “acts occasioned exclusive by violence of nature without the interference of any human agency”), terrorism, war, extreme weather, etc.
“They may or may not specify epidemics, pandemics, or quarantines,” per Herbst, who notes that 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.”
And even if your contract does, in fact, state that a pandemic is covered under force majeure, that is not an automatic homerun, as you will 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, Herbst says, “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.”
As for contracts that do not include any force majeure language, the Uniform Commercial Code is worthy of attention, as the set of commercial laws that apply to most contracts involving sales of goods, establish that “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.”