As the spread of the COVID-19 pandemic continues its course, the luxury fashion industry has been getting hit hard. With February’s fashion weeks long behind us, the fashion industry is now taking drastic measures when it comes to their cruise and resort shows.
According to Business Insider, there has been a plethora of U.S-based fashion editors, influencers, models, among others that traveled to Milan for fashion week and came back to notices from their employers requesting that they self-quarantine. Since then, Governments all over the world began to put measures in place such as the closures of non-essential businesses and social distancing in order to prevent the continued spread of the coronavirus and flattening the curve.
Currently, fashion houses are canceling or postponing upcoming shows en masse. Shows that were canceled are as follows:
Giorgio Armani postponed its April cruise show to November
Versace and Gucci each canceled U.S shows planned for May
Prada has canceled its May resort show, which was set to take place in Japan
Fashion shows overseas that have been canceled:
Anna Wintour also mentioned that the Met Gala would be postponed, indefinitely.
Since these shows have been postponed or canceled due to COVID-19, this brings into question the contracts between these parties and what happens to their obligations if they can’t perform. The Chinese government, for instance, has issued over 1600 “force majeure” certificates purporting to excuse businesses for failing to uphold their end of the contractual obligations.
The fashion and retail markets are estimated to experience losses of up to $43 billion in 2020. The industry is heavily dependent on its contracts with garment and accessory manufacturers, which are primarily located in China and in Italy for certain luxury brands. Besides the U.S., these two countries were hit the hardest by this global health pandemic.
Excusing Performance By Force Majeure
A force majeure clause becomes a key provision that is a point of negotiation between the contracting parties which may excuse either of the parties from the performance. A force majeure clause essentially acknowledges each party’s liabilities and/or obligations as a result of extraordinary events or circumstances that are not under the control of the parties. Events such as natural disasters, war, acts of God, or labor strikes, are typical triggering events that would excuse a party from continuing to fulfill their contractual obligations completely or delay it until the passing of the triggering event.
Just like the laws of the contract itself, a force majeure clause works differently throughout the world. Whether a brand can count on or dispute another party’s reliance on a force majeure clause to excuse their performance will rely heavily upon the jurisdiction of the parties and the triggering events that were included in the force majeure.
When there is no contract or no force majeure clause in the contract, failing to perform because of issues caused by the coronavirus may constitute a breach of contract, which could result in termination of the agreement as well as damages and possible litigation. However, even if a force majeure clause is included in the contract, it doesn’t necessarily mean that it extends to situations like the Coronavirus depending on whether it was broadly worded or specifically worded to include global health pandemics.
Other Legal Forms of Relief from Non-Performance
Absent a force majeure clause in a contract, non-performance may be excused through the application of the common law doctrines of impossibility, the frustration of purpose, and failure of consideration. Additionally, parties in the sale of goods contracts may also be able to rely on the defense of impracticability.
The doctrine of impossibility excuses a party’s contract performance when an unforeseen and unanticipated event makes performance objectively impossible. Proving objective impossibility due to the coronavirus is probably easiest if a government restriction directly prevents performance. However, where the restriction has an indirect effect, a party may have difficulty persuading the applicability of this doctrine.
Frustration of Purpose
The frustration of purpose is another common law doctrine that may excuse performance. It applies where a change in circumstance makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract. Unlike impossibility or force majeure, where the performance of the contract must be objectively impossible, frustration can apply where no actual impediment to performance exists. For that reason, frustration may be easier to invoke than impossibility or force majeure if the invoking party can prove that the frustration is central to the parties’ agreement. Frustration may be applicable in contracts for a hotel, conference facilities, and large gathering events.
Failure of Consideration
Failure of consideration is another common law doctrine that may be applicable in excusing performance. That is, where the good bargained for becomes worthless, or so altered as to be of little value, the party harmed may be excused from its contractual obligations. There is precedent in the law for basing a failure of consideration on a change in the law.
Impracticability for the Sale of Goods
Sellers under sale of goods contracts may be able to excuse their inability to deliver all or some of the goods with the impracticability defense under the Uniform Commercial Code §2-615. The defense requires the breaching seller to show “(1) a contingency (2) the impracticability of performance as a consequence of the occurrence of that contingency, and (3) that the nonoccurrence of the contingency was a basic assumption of the contract.”
This may be invoked when the seller experiences “a marked increase” in the cost of supplies or where the seller cannot obtain supplies due to a “a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, the unforeseen shutdown of major sources of supply.” For instance, iif governmental restrictions are shutting down the supply of raw materials or driving up the materials’ prices significantly, a seller may be able to rely on this section to excuse partial performance or nonperformance.
This defense still requires the seller (1) notify buyers “seasonably” of the delay or non-performance and (2) where partial performance is available, allocate the partial production among customers under contract, and regular customers not under contract in a way that is fair and reasonable.
While the defenses discussed here may allow parties to excuse nonperformance due to the coronavirus crisis, the ultimate resolution of these issues will depend on the specifics of the parties’ contracts and the facts in each case, as well as developments in case law, executive orders, and legislation. In the meantime, measured and principled negotiation between contract parties to reach interim resolutions is probably the best response amidst the uncertainty in the law.
Moving forward, the importance of carefully crafted contract terms cannot be overstated, as parties need to account for all the business realities that are known and unknown which may potentially impact their contractual performances. By working with a knowledgeable legal advisor, the parties may be able to spread the risk of liability in the event of an unforeseen crisis.
If your business or event has been affected by the pandemic, contact us for more information on understanding your rights and remedies.