Out of the Ordinary

Supply Management - 04/10/2007

Paul Carter Hemlin
Force Majeure

In the world of business it doesn’t always matter how many strategic plans you have in place there are some things that are just out of your control. But help is at hand thanks to a contractual clause called ‘force majeure’, meaning the ‘greater good’. The definition of this clause however, can be dependant on many factors as Paul Carter Hemlin, Director of Blake Newport Associates explains.

Every business lives in fear of circumstances outside of their control, from flooding to fire terrorism to riots. A written contract offers a vital means of protection – but only if ‘force majeure’ is applied correctly. The basis of a ‘force majeure’ clause is to exempt a party from performance when an extraordinary event beyond the control of that party prevents them from performing obligations under the contract. The clause reflects the common law concept of ‘frustration of contract’ which allows a contract to be discharged with no blame or fault.

In order for the term of frustration to be met, there must have been a radical and unforeseen turn of events that completely changed the very nature of the original contractual obligations. In commercial terms the clause is there to address those risks, which cannot necessarily be economically insured and are outside the control of both parties.

To ensure a sound clause there are a number of things that purchasers should be aware of when it comes to negotiating a ‘force majeure’ clause. Firstly they need to ensure that it applies equally to all parties under the agreement. Secondly, it is advisable to set out some specific examples of acts that will excuse performance under the clause, such as wars, natural disasters, terrorism and other major events outside of all parties’ control.

For time critical contracts, purchasers should make it clear that the contracted supplier is obliged to take reasonable steps to prevent or limit the effects of the outside interference, either when they become likely or actually occur. An important aspect for purchasers is that a ‘force majeure’ clause can be used to excuse only part of the obligations of one or both parties. For example a strike might prevent the timely delivery of goods, however it doesn’t necessarily prevent the timely payment for the portion delivered. Similarly a widespread power failure would not constitute a ‘force majeure’ excuse if the contract required the provision of back up power as a contingency plan.

In addition it may also be advisable for Purchasers to ask your suppliers to provide you with a written contingency plan for each event they want defined as a ‘force majeure’. For example if they have a problem at one of their factories, you may want them to be specific about the quantities of materials, tooling, people and other resources that will need to be redirected to another facility and the process of redirecting them.

For operational flexibility it may be wise to add a clause that allows you to wave any obligation of exclusivity to your supplier in the event of ‘force majeure’, giving you the freedom to purchase from another supplier during the time your contracted supplier is unable to perform. Stipulating that you are a priority customer and requiring the supplier to serve you first once they are up and running is also an advisable course of action.

Generally what is permitted to be a ‘force majeure’ can be the source of much controversy and purchasers should resist any attempt to include something that should be at the risk of the other party. The clause is not intended to excuse negligence of a party and should not enable a party to escape liability for bad performance. Careful contract management is key and will ensure that your company is adequately covered in those occasional moments where control is all but lost.

More News and Media