Industry should learn from the setback and study contracts before signing

Over the last month, the only other topic of discussion for the apparel industry besides COVID-19 and its impact has been the cancellation of orders by many leading buyers. Though the two are interrelated at this point of time, the cancellations have thrown light on an issue which has cropped up time and again, but exporters – in their enthusiasm to grab business – often ignore or overlook the significance. I am talking about what is commonly referred to as the ‘Force Majeure clause’.

Most business deals have this clause embedded in the contract, and similar to ‘subject to’ conditions laid out in insurance and financial market forms, are not given importance when signing the contract. But when a situation arises where the clause can be enacted, the party affected has no legal protection. The clause allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.

In the case of COVID-19, most buyers have specifically taken refuge in the clause. A letter from Arcadia addressed to its supply chain reflects the stand of the buyers and says it all. While thanking all for supporting the company in these difficult times, he clearly reiterates their right to cancel orders.  Extracts from the letter written by Ian Grabiner, CEO of the company, are as under.

“We wanted to take you through the part of our contract that allows us to cancel any order. Condition 18 of the Conditions of Trading section of the Supplier Handbook says that:

“We can ask you to suspend or cancel any delivery or order if we cannot use, or are hindered or prevented from using the goods because of any cause beyond our control… If we suspend or cancel an order, we will not be legally responsible for any direct or indirect damage or loss this may cause you.” He goes on to specify, “You will note that we are able to cancel any order at any stage. This includes orders in production and orders in transit. Where we cancel an order, we are not responsible for the cost of the goods, the cost of any fabric, or any other cost at all, including the cost of any trim or component.”

This is not the first time and will certainly not be the last time that manufacturers will be left in a lurch because of a clause in the contract which they did not read or take seriously. In 2009, when the German company Arcandor, which owned the retailing giant Karstadt, filed for bankruptcy, close to 70 apparel suppliers to the retailer in India who were doing business with the company through Li & Fung, the sourcing agent of the retailer in India, faced losses of over $70 million.

Exporters united to fight for their money and claimed that the terms of payment from Li & Fung were letter of credit ranging from 60 to 120 days, and the buying office was, in fact, working like a financier and banker that made a kill by striking deals with the MNC buyers and small-time exporters in the sub-continent. On study of the contracts signed by Li & Fung with the Indian exporters, it was found that the buying office did not have any legal responsibility to pay vendors in case its clients went bankrupt. This left the exporters high and dry, as mere bankruptcy filing by a company does not call for a legal case against it, so the companies could not directly ask Karstadt for payments on account of shipments made to the retail giant.

The current crisis will pass, but clauses in contracts will continue to survive, and if businesses don’t take the learnings and study contracts more deeply, asking for some protection clause, they will continue to suffer. The only recourse is to appeal to the humanitarian in people to support, which is the current picture with governments and associations virtually pleading for help!