Crisis Phase Two: Delayed Payments
As the Covid-19 pandemic began to hit the bottom line of buyers, suppliers reported increased delays in payments. Our survey confirms these reports. 10.9% of suppliers said they experienced delays of 1 to 10 days in payments, relative to contractually stipulated terms, and 68.8% said they experienced delays of more than 10 days. [See Figure 2.] Indeed, according to Mostafiz Uddin, some buyers were pushing back payments by 30 days or more.
Crisis Phase Three: Cancellation of Orders in Progress
By mid-March 2020, an even deeper crisis began to hit the industry. Buyers began to abruptly cancel (or put on hold) not only future orders, but orders already in process. Some of these orders were entirely finished and ready to be shipped, but the buyers refused to accept order shipments or honor their contractual obligations to pay for these orders. At the time of the survey, 23.4% of suppliers indicated that “a lot” of in-process orders had been canceled, 22.3% had “most” of their in-process orders canceled, and 5.9% had all of their inprocess orders canceled. [See Table 1.]
According to press reports, Primark – which last year posted operating profits of $1.07 billion – is one example of a buyer that canceled all its orders with its suppliers. This includes “orders already in production at factories” (emphasis mine).
Many buyers are evoking the force majeure clause in their contracts to justify the breaking of their binding obligation to pay for orders in production. But, for fashion law expert Alan Behr, this appears to be an unjustified use of the force majeure clause since most force majeure clauses do not specify pandemics as a reason for failure to pay. More importantly, according to Article 7.1.1 of the Vienna Convention for International Commercial Contracts, force majeure claims should apply to the party with the most relevant contractual obligation, which in this case would be the Bangladeshi factories producing items, not the buyers that have agreed to pay for them.
Press reports show that, as of March 22, 2020, buyers had canceled $1.44 billion worth of Bangladesh garment exports. The survey results show that in the majority of cases (72.1% of cases), when in-process orders have been canceled, buyers have refused to pay for the cost of raw material (fabric, etc.) that was already purchased by the suppliers. Buyers also refused to pay the suppliers’ cut and make production costs in 91.3% of the cases. [See Figures 3a and 3b.] The impact of these abrupt cancellations of in-process orders has been severe; 53.4% of suppliers report shutting down most of their operations and 4.5% of suppliers report having already closed their facilities. [See Figure 4.]
Impact of the Three Crises on Workers
The impact of these developments on workers has been devastating. At least 1.2 million workers had already been affected by the order cancellations. The question now is what sort of support, if any, workers can be expected to receive. For suppliers who abruptly lost buyer in-process contracts with no compensation, 72.4% said they were unable to provide their workers with some income when furloughed (sent home temporarily), and 80.4% said they were unable to provide severance pay when order cancellations resulted in worker dismissals. [See Figure 5.]
When asked if buyers agreed to assist suppliers with the cost of furloughing workers as a result of buyer in-process order cancellations, 98.1% of suppliers indicated no such support was provided. When asked if buyers agreed to assist suppliers with severance pay costs when workers were dismissed as a result of buyer in-process order cancellations, 97.3% of suppliers responded that buyers provided no such support. [See Figures 6a and 6b.]
As noted by Kalpona Akter, executive director of the Bangladesh Center for Workers Solidarity, “Garment workers live hand to mouth. If workers lose their jobs, they will lose their monthly wages that put food on the table for them and their families.” She adds, “If workers are laid off, brands should ensure immediate payments to factories so that workers receive their full legally-owed severance.” As Covid-19 starts to gain a foothold in Bangladesh, workers and their families also will be burdened with considerable health care expenses, making the payment of wages and severance all the more urgent.
Covid-19 in Bangladesh and the Government Lockdown
On March 25, 2020, the situation reached an entirely new level when the government announced a countrywide lockdown. The lockdown includes a ban on passenger travel via waterways, rail, and domestic flights. Public transportation on roads also has been suspended. However, it appears that, given the importance of garment exports to the economy, at this writing, garment export production is permitted. The challenge for those factories still receiving orders will be providing transportation to workers while fully ensuring that they are kept safe with appropriate social distancing and other measures.