Thursday, March 17, 2011

Force Majeure

The French term Force Majeure meaning "superior force" is normally interpreted to mean an extraordinary event or set of circumstances that are beyond the control of the party, which is preventing the party from meeting their obligations under the agreement. A force majeure clause may excuse the party from performance or it may simply excuse performance during the term of the force majeure event.


For example here is a force majeure clause.

Force Majeure

Neither party will be in default or liable for any delay or failure to comply with this Agreement due to any act beyond the control of the affected party, excluding labor disputes, provided such party immediately notifies the other.

The issues that usually get negotiated in negotiating a force majeure clause is what types of events fall into the definition of what constitutes a force majeure.  Clearly “acts of God” such as natural disasters such as flooding, hurricanes, tornados, earthquakes, typhoons, and conflagrations that prevent a part from performing would be a force majeure as those are acts outside the control of the party. So would be things like accidental fires, or accidental building collapses. Wars, riots or crimes also are acts beyond the control of the parties. .

Force majeure is not intended to excuse negligence of the party or where consequences are predictable. Circumstances that Suppliers traditionally want to add to the definition of force majeure are labor disputes such as strikes or lockouts and non-performance by their suppliers. With respect to strikes, those are a predictable event and Suppliers need to manage their business and their performance accordingly so if there is a strike they are able to perform. Lockouts are not only predictable, they are within the control of the Supplier, so why should you excuse a Supplier from performance for something that is within their control? The concept of a force majeure is to deal with something that is outside the parties’ control.

Another concept Suppliers may want to include is non-performance of their Suppliers.
It may be reasonable to allow force majeure for non-performance of one of their suppliers if that supplier on its own suffered a force majeure event.  For any reason other than a real force majeure event it shouldn’t excuse the as what you really are doing is allowing the Supplier to not manage the Subcontract or their selection.

A common Supplier request change for force majeure is to exclude the obligation of payment from the force majeure so that the Buyer is obligated to make any payments it owes irrespective of whether the Buyer or the Supplier is claiming the force majeure. This would normally be acceptable as long as it would be for any payments that are due and owing at the time.

The last thing to think about in writing or negotiating a force majeure clause is the impact of allowing the Supplier an excusable delay in performing.  A lot depends on how long it would take for the Supplier to recover, and the type of commitments made, and what investments or commitments you may need to make with other suppliers in the interim.  For example, do you want to still be obligated to have to purchase a specific quantity of a product if the Supplier can recover in one month? The answer to that is probably. What if it would take a year to recover?  Would you still want to be committed to purchase a specific quantity from the Supplier if you had to make a significant commitment to another Supplier in the interim to have them meet your demand?  How about if you had to make a significant investment to bring on the alternative source?  Or the cost impact of having two sources operating at lower volumes would drive your cost up? 

I’m a strong fan on including a time limit on force majeure where if there isn’t recovery within a specific period, you have the right to terminate any firm commitments without liability. Suppliers will have concerns over that loss of potential revenue and profit, but the reality is that most Suppliers carry what is called Business Interruption Insurance to deal with most of the acts that would constitute a force majeure to protect against such risks. As such, it really isn’t such a loss to them. 

For a tip on negotiating termination in the event of an extended force majeure read the post on Business Interruption Coverage.

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