Tuesday, February 15, 2011

Negotiation – Thoughts on Negotiating Force Majeure

A force majeure is an excusable delay to performance.

In negotiating a force majeure there are usually two main considerations.
1) What events constitute a force majeure?
2) What are the obligations of each party during the force majeure and after it has passed?

Suppliers will want the events to be fairly broad to include things like labor problems or problems with their Suppliers. Buyers want the events that will excuse performance to be clearly beyond the control of the Supplier. That would exclude labor problems, and would require delivery problems with Suppliers be based on things such as a worldwide shortage or allocation of parts, not because the Suppliers subcontractors failed to deliver.

In negotiating Force Majeure you argue that the intent of agreeing to a force majeure is to provide excusable delays for acts that are truly outside the control of the parties. In the example of labor problems, lockouts are totally within the Supplier’s control to manage. Strikes are usually not something that happens instantaneously, and the Supplier should be able manage and have a contingency plan not to affect you should a strike occur.

With respect to the party’s obligations, a force majeure provides the party claiming the force majeure situation with an excusable delay to performance.  It does not cancel any obligations. In negotiating a force majeure the Buyer need to consider the potential impact to your business and your needs. For force majeure situations of a short duration having all commitments remain in effect may not be a significant problem. The longer the duration of the force majeure, the greater the impact it may be. You may no longer need or want the delivery as the reason why you were purchasing it may have passed.

Where negotiation of a force majeure responsibility after recovery is critical is when you
have firm purchase commitments such as a commitment to purchase a specific quantity
of product from a Supplier or when you have committed to purchase all or a percentage of your requirements from the Supplier.

If the Supplier is unable to perform many times you will need to find an alternative source of supply in the interim. To do that you may have needed to make certain investments or commitments. You may want to get the return on those investments or may need to meet those commitments to avoid liability with the alternative source.

Things that I would look for are:
·       The right to cancel any open orders without liability should there an extended delay. Suppliers may object to such cancellation rights, but in most cases they would be covered for any losses to the interim business by normal business interruption insurance coverage.
·       For any firm purchase commitments, I would want all the purchases that would have been ordered during the force majeure period to count toward meeting those commitments.
·       For any commitments to purchase a fixed percentage of your requirements, I
would want all the purchases that would have been ordered during the force majeure period to count toward meeting those commitments. Otherwise you could be forced to purchase a much higher quantity from them when they recover to meet the commitment. That would penalize the other Suppliers.
·       For any commitments to purchase all of your requirements from a Supplier, I would want that excused during the force majeure period and I would want to be allowed to purchase from the alternative source whatever quantities are required to meet any commitments that were reasonably made to secure supply.
·       If recovery by the Supplier would be for an extended period, I might try to simply negotiate the right to terminate the agreement without cause and without liability. In significant force majeure situations such as natural disasters or fires, the Supplier should be covered for an damage to products or inventory under their insurance and they should also be covered for loss of sales if they carry business interruption insurance.

A key point in these discussions is you shouldn’t be penalized because they had a force majeure.

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