Force Majeure in Fashion

*** The writing does not, and is not intended to, constitute legal advice by any means***

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Companies around the globe are making tough business decisions in the face of a virus that's tearing apart every fabric of human existence to an unimaginable degree. Fashion can't be an exception. This semester, I am taking an intellectual property contract drafting course. Recently, my professor shared a link to a webinar hosted by Venable on the subject of contract performance in times of COVID-19. After listening to the webinar, I came across dozens of articles that touched on the issue of contract performance between fashion retailers and their suppliers. So it occurred to me that this is the perfect time to re-think the conventional wisdom of contract drafting, having seen its inadequacies laid bare in the wake of the current crisis.

Two weeks ago, GAP announced that it will cancel summer and fall orders (except those intended for e-commerce) as the American retail giant tries to mitigate the damage wrought by COVID-19. To better grasp what's really going on here, one should be familiarized with the retail aspect of fashion. Fashion has a forward-looking calendar. That, in turn, means that, in order to put new summer looks on shelves, a company has to place an order to its suppliers well in advance. The company pays a deposit upfront as a guarantee so that its suppliers can proceed with the order. After completing manufacturing, suppliers send invoices as clothes are ready to be shipped. (In technical terms, the money owed to suppliers is called "accounts receivable"). Once the shipment has arrived, suppliers are paid what's on the invoices. Having said this, what GAP has just announced is that it will renege on the promise on the receipt of delivered goods, and thus will not pay the accounts receivable. So the effect of the cancellation is, in essence, backward-looking. How can giant fashion retailers such as GAP do that? I do not have access to GAP's supplier contract. However, a hint might lie in its force majeure clause.

The force majeure clause refers to a contractual provision that relieves the parties from performing their contractual obligations if doing so would be impracticable (meaning, contract performance would be overly burdensome) or if, in continuing the performance, the original purpose of the contract is frustrated. Events of unforeseen nature (unforeseen to the extent that they are almost viewed as an "Act of God") can trigger the force majeure clause if it's included in a contract. (Having said this, the mere existence of a force majeure clause, especially if's a boilerplate, does not automatically translate to a win!) If it's not, then the non-performing party may be out of luck. (Caveat: contracts usually include termination clauses, which would allow adversely affected parties to seek monetary damages in case of unilateral termination.) Courts are generally inclined to honor a written contract under the idea that the contract is the final memorialization of the intent of the contracting parties. Unless a grossly unjust result would come out, courts do not second-guess that intent by introducing outside evidence. (This is a very general statement that needs qualifications. However, it suffices to say so for the purpose of this post.)

In referring to force majeure events, the parties would normally use the phrase such as "events that are reasonably unforeseen by the both parties". So if the parties were to pursue a lawsuit, they will fight over that clause to see if COVID-19 can be characterized as something beyond both parties' contemplation. For example, if the provision contains the language along the lines of "pandemic", "outbreak of infectious disease", or even "global health crisis", the performing party would have a hard time defending its non-performance as the insertion is likely to evidence the parties' intent of having contemplated the possibility of a supply-chain-disrupting event like COVID-19, however unprecedented it is. Plus, courts in some jurisdictions were hitherto unwilling to interpret economic downturns as being sufficient to invoke the force majeure clause. (See generally Elavon, Inc. v. Wachovia Bank, Nat. Ass'n, 841 F. Supp. 2d 1298 (N. D. Ga. 2011), stating that "the economic downturn of 2008 was not an 'act of God'".) Although the comparable extent of the current economic crisis remains unfathomable, I'm doubtful as to whether courts would take into the account the entire impact of the crisis that's still unfolding rather than looking at the time window during which contract performance was allegedly rendered impracticable. In addition, judges will take note of a patchwork of government regulations, both state and federal, that would be rolled out in coming weeks.

However, we all know that litigation is costly and time-consuming. Especially when courts are juggling with excessive caseloads, litigation might not be a good idea. A final judgment, let alone its enforcement, would take longer than usual. (Even the Supreme Court is now operating on the teleconference system.) Alternative dispute resolution (ADR) methods, such as court-binding arbitration or meditation, can surely serve as a viable alternative in the meantime. However, it can't be emphasized enough that parties in dispute should try their best to find a middle ground in this difficult time, sharing in the pain no one expected to experience only a few months ago. For one, a supplier can continue to deliver partial performance in return for a promise that its supplier contract would not be unilaterally cancelled solely because of the COVID-19 situation for the present moment. GAP will not be the first major retailer to pursue this path. Would this cost-saving measure worth losing the positive perception of the public or damaging relationships beyond repair with its suppliers? As with everything during COVID-19, no one knows. Everyone is navigating uncharted waters with no easy way out in near sight.