Global Brands Group is coming under fire for allegedly failing to make good on its contracts with suppliers. In a statement in late March, Rick Darling, CEO of Global Brands Group – whose portfolio of brands that it “owns, licenses or manages” ranges from Sean John, Calvin Klein, and Dirk Bikkembergs, to Barbie, Lego, and L.O.L. Surprise, among others – revealed that “given the unpredictability of the situation, our retail partners have cancelled orders, and existing inventory and product in production may have no sell-through.” As a result, “We have no choice but to make the difficult decision to cancel all S/S 2020 orders from all suppliers (without liability).”
In an attempt to allegedly escape at least some of its existing contracts, Global Brands – whose CAA-GBG arm is responsible for the sales and business development of Kendall and Kylie Jenner’s eponymous label, as well as those of P. Diddy and Cardi B, among others – is “refusing to pay its garment suppliers for orders produced in February and March following a drop in sales caused by the coronavirus pandemic,” fashion industry non-profit organization Remake reported.
The move comes in line with a larger pattern of big-name brands seeking to minimize their losses as retail stores have been subjected to mandates closures and consumer spending has plummeted. At the same time, it continues to raise questions about the legality of the situation, and as a result, sheds light on the doctrine of force majeure and its applicability, particularly as cities and countries across the globe begin to reopen.
A legal provision that is often included in contracts of all sorts, including the supply-centric ones that are at play here, force majeure applies when extraordinary events or circumstances beyond the control of a contract party, such as a war, strike, “act of god” (a natural hazard, such as an earthquake or tsunami) or an epidemic, that makes it impossible for one of the parties to fulfill its obligations.
Much has been made of the drop in consumer demand and delay in manufacturing and delivery of garments and accessories, among other goods, due to the onset and continued spread of COVID-19, and whether such ramifications of the pandemic open the door for companies to point to force majeure clauses in their contracts in order to get out of existing obligations to accept and pay for orders that were placed long before coronavirus drastically shifted the state of retail across the globe.
Beyond simply questioning the applicability of such contract terms, “some are questioning the boundaries of an obligation to fulfil payment terms in light of a force majeure event,” says Christo Erasmus, the head of legal at Bidvest International Logistics.
It is well-established that invoking such a provision is rarely an easy transaction for at least a couple of reasons. For one thing, “The applicability of a force majeure provision is contract-specific,” according to a recent client memo from New York-headquartered law firm Paul Weiss. “While recent governmental regulations intended to contain the COVID-19 outbreak may make it easier to invoke a force majeure clause not previously triggered by the virus,” the firm notes, there is, nonetheless, “a high bar for invocation of such a clause.”
As Erasmus asserts, part of the reason the bar is so high is because “force majeure only comes into effect when it is objectively impossible, not just difficult, burdensome or economically onerous, for a party to an agreement to fulfil their obligations.” As such, for a party to successfully prove that a force majeure provision applies, it will need to establish “a direct link to the pandemic and explain why it is or was impossible to fulfill their obligations.”
In establishing whether force majeure pertains to your circumstances, Erasmus says that four key elements are worthy of attention: “First, ask yourself if it is objectively impossible (not just difficult) to perform your contractual duties.” If that is the case, the party seeking the get out of the contract will need “to establish to what extent the impossibility can be attributed to Covid-19.”
After that, Erasmus says that a the party needs to “look at how long [its] inability to perform will last, and at short-term solutions, such as a repayment plan, amended obligations or an extended performance timeline.” And, finally, he suggests that the party determine whether “there are any other avenues available to mitigate [its] or the other contracting party’s losses.” That way it will be in the best position to rely on – and reap the benefits of – the contractual provision.
As for how long companies will be able to rely on potential force majeure is yet to be seen, according to Erasmus, who says that “a party’s obligations” – and its ability to claim that a force majeure provision applies – are subject to change, as cities and countries move through the various phases of reopening. “In some stages, a party’s contractual performance might be illegal and thus, impossible, while in others it may not be,” he states. “So, continual re-evaluation is needed to assess whether force majeure can be invoked.” Ultimately, he says that “there is no blanket approach” to how and when such a remedy applies, meaning that “this is something that has to be assessed on a case-by-case basis.”
While it is difficult to determine exactly when such provisions come into play, what is clear is that companies run the risk of reputation damages should they fail to appropriately address supply chain issues in light of the COVID-19 pandemic, regardless of whether force majeure applies or not. “With brands still holding payments from February and March, many of the women [working in the supply chain] are risking their health to head to factories, while struggling to pay rent or buy food,” Remake Founder Ayesha Barenblat said in an interview in connection with Global Brands’ recent contract snafu.
Companies like Global Brands, she says, “have a choice” when it comes to upholding their contracts and ensuring that the laborers, themselves, are not put at risk by what Business and Human Rights Resource Centre’s Phil Bloomer and Alysha Khambay call an “onslaught of order cancellations, reduced order volumes and extended payment terms, which have left many suppliers having to reduce operations or stop them altogether, unable to bear the financial burden.”
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