Question: Will China suppliers exploit the Force Majeure clause during the Covid-19 pandemic?
Note: This article was written in the middle of the Covid-19 pandemic of 2020, however the topics covered are relevant for any readers wishing to understand how a Force Majeure clause works in China.
Why I am worried about a Force Majeure clause in Chinese contracts
Besides the obvious concern for the human costs if infections spike and the virus isn’t fully contained, when I look at my China supply chain, one of my top concerns is about how the factories will leverage Force Majeure to my detriment.
Because I consider having a good contract a key pillar for sourcing safe in China, it horrifies me to think that my suppliers may have the ability to de-commit from their contract obligations and that my options for recourse may be limited.
Short introduction to the Force Majeure clause and how it is used in China vs. US
Force Majeure refers to a clause found in a contract to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict participants from fulfilling obligations. In other words, it’s a legal tool that Chinese suppliers can use get out from under the terms of your contract.
In the US, for example, the scope of a force majeure clause is generally limited to very large events like wars and “acts of God” such as natural disaster. As such, it is very rarely invoked. Even before the Corona virus came on the scene, Chinese businesspeople were more liberal in the scope of what they consider to be “beyond their control” and subject to force majeure. Here are the two most common examples:
Changes to government policy.
When Beijing changes the tax code, environmental law or export quota, it has an impact on the Chinese factory’s bottom line. I have had suppliers try to invoke force majeure to nullify certain key terms in the contract and thus attempt to renegotiate a more favorable arrangement.
Changes in the supply chain.
If your supplier’s sub supplier goes out of business and forces your supplier to find new sub-suppliers at a higher cost, do you think a Force Majeure clause is applicable? Some Chinese do!
Does the Covid-19 pandemic fall in the scope of a Force Majeure clause?
I’m fully expecting Chinese suppliers to claim Force Majeure, as the Coronavirus is giving them a “get out of jail free card” for unilateral changes in price, quality and lead time. I’m also expecting the Chinese courts to share that same opinion!
Am is safe if there is no Force Majeure clause in my contract with Chinese suppliers?
You might be saying to yourself, “no problem, I don’t even have a force majeure clause in my contracts with suppliers”. Sorry, wish it was that simple.
Even if the Force Majeure term is removed from the contract, given that Beijing has put containment of the corona virus as top priority, Chinese courts will almost certainly interpret the concept of Force Majeure as being built into the Chinese legal system itself and applicable whether a Force Majeure clause is found in the specific contract or not.
The good news is that as the Coronavirus gets under control, the supplier’s ability to “play the force majeure card” will diminish. But in the meantime, the techniques explained in the following section will offer some protection.
How to enforce the terms of your supplier contracts if the seller can invoke a Force Majeure clause?
In my book, blogs and this video tutorial I debunk the myth that “relationship is everything” when it comes to managing Chinese suppliers. In a “normal situation”, unlike what we are facing with Covid-19, it is important to have a balance of relationship, contracts and monitoring. It’s like a 3-legged stool, if one of the legs is missing or off balance, the whole thing collapses.
But thanks to Covid-19 and Force Majeure, we can’t count on the “contract” portion of our supplier management framework to protect us over the next few orders as we wait for the day that the current outbreak is no longer an issue.
So, what to do if you suddenly find yourself without the ability to fully leverage your contracts to enforce terms for price, quality and lead time?
Short Answer:
Go all in on Relationship and
Monitoring for the short term.
Long Answer: Have a contract
It’s still worth having a bilingual contract even if this force majeure situation weakens it. At the very least, a contract sets the tone of the relationship, states the goals and shows the China side that you are both professional and serious. Skipping the contract is a great way to show the supplier that you are an easy target.
The good news is that it is not expensive to retain a China lawyer, and there are simple ways to build a solid relationship with your suppliers. Even if you no longer have the ability to meet them face-to-face due to travel restrictions during the pandemic.
Here is an excerpt from an interview I did with Smart Company magazine:
While the Chinese can be hard negotiators and the cost of frequent visits to China is not insignificant for start-ups, Bellamy says putting the effort in to build strong relationships is worth every cent.
“It’s important to be seen as a person rather than as a purchase order number. You don’t need to come here every week to build a bond of trust” Bellamy says.
Bellamy adds that inviting factory leaders out to your home town, sending Christmas cards and encouraging your kids to be pen pals are all great strategies for developing strong ongoing relationships. And those items don’t cost much.
- Have you asked your supplier how they are doing, or do just beat them up for being late with the order?
- Show the suppliers the light at the end of the tunnel. Now is an excellent time to share your long-term forecasts and mentioned the orders you are ready to place if the supplier can find a way to stay the course in terms of the price, quality and lead times that were agreed before the outbreak.
- Get eyes at the factory! I’m not saying you should fly yourself to China anytime soon, but now that the cities are no longer on full lockdown, it’s possible to get inspection agents and other buyer representatives into the production zones to see things first hand, even if you can’t go yourself.
Pro Tip: Align interests and long-term goals for mutual benefit
Long before the virus outbreak, Chinese suppliers were reluctant to share bad news or even ask for help because they fear the buyer will switch suppliers. Make extra effort to explain to your Chinese partners that you are “in this together” and that the more transparency they offer you into what is really going on, the better you can work to keep the global supply chain flowing for mutual advantage. Let the suppliers know you have invested a lot of time and money in vetting them on to your approved vendor list and you don’t casually drop vendors.
Related Content:
Full 1-hour tutorial on the topics of how to source safely in China
revised from: Apr 01, 2020
ABL Blog: Sr. Editor and Primary Content Creator: Michael J. Bellamy
Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses. Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.
A featured presenter on China issues at seminars, trade shows and corporate events across the globe.
Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/
Mike is the author of “The Essential Reference Guide to China Sourcing”
(available on Amazon).