The Moral Implications of Force Majeure Clauses in Commercial Contracts

By Sara Joy - Law Student @ Downing College, Cambridge

 

[Before reading this article, it would be beneficial to read the previous Oxbridge Launchpad article “Covid-19 and Contracts”]


Force majeure clauses typically excuse one or both parties from performance of obligations under a contract due to the occurrence of events outside its control. The outbreak of covid-19 had caused the implementation of measures such as social distancing, national lockdowns and travel bans which have impacted the operations of businesses. Given the narrow application of the similar common law doctrine of frustration, many businesses have responded by actively including Covid-19 specific force majeure clauses within contracts. They have sought to rely on these where an unpredictable state of affairs prevents them from fulfilling their obligations.


A common example of the use of a force majeure clause in this context would be the case of Western buyers who have used these clauses to cancel purchase orders they can no longer pay for. Where these orders had already been completed or in the process of being completed, there can be a huge impact on vulnerable workers in the supply chain. Workers in the Ready-Made Garment industry have been particularly impacted by the use of these clauses. The ‘race to the bottom’ phenomenon has resulted in buyer companies competing to reduce costs by paying lower wages or reducing the quality of the work environment. As a result of these initiatives aimed to keep costs down, suppliers are provided with little margin to pay severance to workers. This is particularly detrimental to these workers who likely have no savings or access to strong government social safety nets.


Relevant regulations

The UN “Protect, Respect and Remedy” framework provides that businesses have the responsibility to carry out human rights due diligence in order to assess the impact of their activities on human rights and identify the most vulnerable people within their supply chains. This concept of human rights due diligence is gradually hardening into domestic law with California, the UK and Australia requiring the public disclosure of involvement in modern slavery, however this legislation did not impose significant legal penalties for non-compliance and was restricted in scope. In March 2021, the EU announced a directive mandating human rights and environmental due diligence for companies based within the EU and foreign firms that conduct significant business there. Although, the UK is no longer a member of the EU, the reach of this legislation may extend to the UK as many British companies conduct significant business in the EU.


How can companies exit contracts responsibly?

25 companies, including H&M, have chosen not to trigger these clauses and instead have committed to pay in full for orders completed and in production following the Covid-19 pandemic. Exiting contracts through these clauses is still a plausible option but should be evaluated considering the impacts on human rights this action may have.


The Better Buying Institute has suggested that buyers should collaborate with suppliers in order to make contract cancellation or curtailment a last resort by:

  • Exploring available options for raising the cash needed by buyers to cover accounts payable to suppliers, such as liquefying assets, issuing corporate bonds, drawing down credit, and securing loans;

  • Discussing with suppliers their financial health and whether they have the cash/ liquidity necessary to retain workforce for at least three months;

  • Accepting and paying for all existing purchase orders for goods that have been shipped, are ready or in progress, or are cut, and not resorting to outright cancellations;

  • Rationalizing current assortment plans and reconfiguring orders to continue producing viable products;

  • Engaging with suppliers to manufacture masks and other needed personal protective equipment for workers on the front lines;

  • Extending delivery dates/accepting shipping delays as necessary; and

  • Paying a portion of orders that have not been cut and future orders that are affected by changes in volume, have delayed shipping deadlines, or are on hold.

In summary, whilst Covid-19 has had devasting impacts for the ability of buyers to fulfil their contractual obligations where a supply chain is particularly fragile, the use of force majeure clauses must be used responsibly and as a last resort to allow for the protection of particularly vulnerable people in the supply chain.


Further reading:

  1. Summary of the law surrounding exiting commercial contracts (Farrer&Co): https://www.farrer.co.uk/news-and-insights/contracts-in-the-time-of-covid-19-force-majeure-and-frustration/

  2. Guiding Principles on Business and Human Rights (UN): https://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf (from page 13 onwards, particularly principles 17-21)

  3. Current implementation of UN Framework (Triponel Consulting): https://triponelconsulting.com/business-and-human-rights-legislation/

  4. Report mentioned in the article (Better Buying Institute): https://betterbuying.org/wp-content/uploads/2020/04/Better-Buying-Special-Report-COVID-19-Guidance-for-Brands-and-Retailers.pdf