Force Majeure: A Contentious Issue
Published: 15 Nov 2011
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This article appeared in Contracting Excellence magazine on 15 Nov 2011
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Should suppliers be allowed to claim force majeure and if so, in what circumstances?
Whenever there is a major incident, this question re-surfaces. Over the years, the list of incidents that constitute force majeure has altered, but the basic principles remain unchanged. Today, however, there seems to be reducing tolerance for this blanket provision that excuses all performance. A refinery fire at a Shell facility in Singapore, the Brisbane floods and the Libyan revolution have been recent examples that created debate and contention.
Should suppliers be allowed to claim force majeure and if so, in what circumstances?
Whenever there is a major incident, this question re-surfaces. Over the years, the list of incidents that constitute force majeure has altered, but the basic principles remain unchanged. Today, however, there seems to be reducing tolerance for this blanket provision that excuses all performance. A refinery fire at a Shell facility in Singapore, the Brisbane floods and the Libyan revolution have been recent examples that created debate and contention.
In part, these questions are fuelled by the rise of globalization. Increased exposure to less stable or predictable markets has increased the potential for force majeure. But there are other factors. For example, the pressure for constantly lower prices has impacted the relative risk and quality of supply sources; many crops today are grown on previously marginal or inaccessible land. It was marginal and inaccessible for a reason. Similarly, there has been consolidation of supply, resulting in limited ability to switch in times of crisis.
Those who disagree with force majeure mostly seem to be buyers. They argue that a good supplier should have back-up plans (even though they do not want to pay the price premium that such plans would involve). And they also tend to overlook the mutuality of force majeure – when invoked by a customer, it is reasonable; when invoked by a supplier, it is unreasonable.
Mature organizations have a sensible discussion about force majeure incidents and consider the actions that can be taken to avoid them, or to avoid their severity. For example, do I want to select a higher price supplier who has fall-back facilities and proven disaster recovery plans, or do I want to multi-source, or am I prepared to take a lower price and self-insure? Increasingly, there are also possibilities to insure against force majeure risk (for example, Zurich Insurance). But again, this involves a cost – and, ironically, the insurer then wants to determine whether the buyer is taking intelligent risk decisions.
Another area of growing interest is to replace some or all of the force majeure clause with a more general ‘hardship clause’, under which the parties commit to a renegotiation if and when there is a major change to supply conditions.
It seems to me that this is another area of contract where there is room for increased discussion and differentiation. It also demands a term that is sensitive to the nature and sources of risk and which party is willing to pay to cover them.
This article is taken from the Commitment Matters blog. For similar items, visit http://contract-matters.com/
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• World Commerce & Contracting
•
2020-04-02 13:14:00
Hello, we are being asked similar questions by a number of members. All FM clauses in new contracts should include a reference to the ongoing pandemic. As you point out there is a risk still that there will be continued fallout from this both on the buy and sell sides. We are advising members to be as prescriptive as possible in thinking about and addressing in their FM clause any future risks that could put the services or goods to be delivered at risk. Think beyond the usual FM remedies of suspension or termination. You may need alterntive remedies which could include a reduction in scope of what is being deliverd together with any associated pricing. You may also wish to consider a phased approach to ramping up obligations after a reduction period due to ongoing uncertainty. It is difficult to cater for all future uncertainties. Thus, we advise that you also build into the contract further agility to cater for complete unknowns that still might arise. IACCM has developed a framework called the VCU to help our members to map out uncertainty within their contracts and ensure that appropriate terms and conditions are used for each contractual relationship. Please contact us if your organisation is interested in participating one of our workshops around this.
• World Commerce & Contracting
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2020-04-02 17:40:50
I think also important to make the point that when an event is known and on-going, in itself it cannot really be a Force Majeure event! So I'm not sure that either party could invoke coronavirus in a contract being agreed now.
What do you think, Paula?
• TRG Law Limited
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2020-04-15 15:42:30
At least under English law, what qualifies as FM depends only upon the wording of the relevant contract clause. Just because a situation such as Covid is known at the time of contracting does not I believe, of itself, prevent a party relying on an appropriate clause providing you can bring yourself within the wording. Of course, if the relevant clause limits FM to matters 'not reasonably foreseeable' then that would be another matter but many clauses do not do so.
Replies: 3
• World Commerce & Contracting
•
2015-07-29 00:19:44
Cameron
I haven't observed such a trend, though I'll see what data we can get. A factor in this could be that the courts - certainly in UK and Australia - now expect that the parties will have attempted some form of dispute resolution prior to coming to court. So perhaps this is a 'behind the scenes' issue.
• Rio Tinto
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2015-07-29 02:08:46
Thanks Tim, good point.
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2015-07-29 10:06:52
I don't know about trust being an issue, but at least in the U.S., arbitration is usually just as expensive, if not more expensive, than litigation. This is especially true if the arbitration involves a panel of arbitrators. Most of my clients did not want a mandatory arbitration clause in the agreement for that reason (aside from the fact that there is no appeal in arbitration). After practicing law for over 16 years, I only handled maybe 20 or 30 arbitrations but countless lawsuits. Lawsuits are cheaper and appealable.
• Rio Tinto
•
2015-08-04 04:41:02
Thanks for that last reply. That is the feeling we have here too and I was wondering if it is shared more widely. Do you find your counterparties agree generally and prefer litigation to arbitration?
•
2015-08-04 11:10:03
Yes, my counterparts definitely agree. Arbitration sounds great in theory, but the only real advantage that any of my clients appreciated is the fact that arbitration documents do not become public record. For very small companies (sole proprietorships) involved in fairly minor disputes, arbitration with a single arbitrator is feasible, but about half of my clients in those situations preferred mediation instead, and then non-binding arbitration. I would say for medium to large companies, litigation is preferable.
Replies: 5
•
2014-03-26 14:39:25
Meant clauses in conflict.
• Huawei Technologies
•
2014-03-27 05:00:55
When drafting and negotiating the contract with your customer, you need to check all the related clauses careflly to avoid any contradiction; and here is normally a clause called Priority to define in case of contradiction which one shall take priority.
But if contradiction is found only after contract signing, and both parites disputes on the priority of the clauses, the things will be more complicated. If the dispute has to be solved by arbitrition or court, there will be cost, and the result is subject to the applicable law. The best way out is to negotiate with your customer and try best to achieve agreement.
•
2014-04-03 05:37:28
An Order of Precedence clause in the contract will usually describe the hierarchy of the various sections of the contract e.g. the Ts & Cs, the Technical Specification, the works Programme, any other documents incorporated by reference. Conflicting clauses in an umbrella agreement may be stated to be subordinate to a purchase order raised against it, so the PO can vary individual terms. It would be rare, and indicative of careless drafting, if two clauses within the same set of Ts & Cs were in conflict; however if this did occur the default position would usually be that the later numbered clause prevails - there would need to be overwhelming evidence that this would be manifestly absurd if the opposite were to apply.
• -
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2014-09-05 06:06:19
I am unaware of Virginia Contract interpretation.Notwithstanding this fact, Ideally,a clarification on contradictory contract provision needs to be sought by the bidder with the Employer through a pre-bid query to remove ambiguity and bring clarity through review/amendment at pre-bid stage itself.In case of overlook,the issue can be got clarified through an amendment to contract before award/signing of contract.Any further ignorance, post award of contract, will have consequential cost to the benefit of either party to the contract.
Replies: 4
Occidental Petroleum Corporation
2019-02-12 17:17:02
Cloud Contracting
I am interested in perspectives on various issues and contracting approaches for the use of cloud services, particularly from niche providers who may, in-turn, actuall...
I am interested in perspectives on various issues and contracting approaches for the use of cloud services, particularly from niche providers who may, in-turn, actually have their applications hosted on a third-party provider like Microsoft, Amazon, Rackspace, etc. I'm looking for perspectives on the entire gambit of issues, including - protection measures used for data at-rest and in-transit; protection of video and images; right of return of all data upon request of customer; obligations of the supplier to delete data when no longer needed (either during the course of performing the services or upon termination of the services and return of the data to the customer); background checks on employees who may have access to the data; monitoring of access by all supplier personnel; business terms like fluctuations in the use of the service (bandwidth, storage space, processing capabilities); right to move the data to different locations in the same country; right to move data to a different country for processing and/or storage; obligations to notify in the case of suspected or actual breach/compromise of data.
• AusNet Services
•
2019-02-28 18:18:23
Hi Mark, Happy to discuss. Send me an email via marie.cullen@medibank.com.au and I can talk about the principles I use.
In my view I don't believe, as a community, we have fully bottomed out all the risks associated with these types of engagement.
M
• Nokia Solutions and Networks Australia Limited
•
2019-06-04 05:22:18
Hi Mark
For a very good, concise review of the principles and issues of cloud agreements generally, covering most of your points above (my view anyway), you might also check out David W. Tollen's book "The Tech Contracts Handbook" online or via this website:
techcontracts.com/2018/06/01/dont-use-licenses-saas-contracts/
I did buy his book, and think highly of it. Notably good balance between concept and practical drafting approaches, not just for cloud matters either.
NB: Personal opinion only, not necessarily that of my employer.
kind regards
Andrew
Replies: 2
• World Commerce & Contracting
•
2020-05-05 08:37:14
Hi Thomas
In my opinion, unless there is some form of parent company or group guarantee, the term would not apply to your fellow subsidiary.
To avoid doubt, it is quite common to produce a schedule that details the background IP that is included.
Replies: 1
• World Commerce & Contracting
•
2020-04-09 14:58:25
Thanks so much for your message and yes we are gathering lots of "good news" stories and as you say, examples of how organisations are demonstrating their agility and adaptability in times like this. Thank you for sharing the story of Meex - I will personally look this up and add it to the output that we are generating. We are indeed focusing on how IACCM supports small businesses more and more and I like your idea about a blueprint for agility. Thank you again and please do keep your ideas coming - they are much appreciated! Sally
Replies: 1
• Victorian Rail Track (VicTrack)
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2020-04-01 04:48:08
Hi - at my workplace we are mainly dealing with FX related claims that are being submitted as force majeure. In these cases, they are (b) - in that did the party have an opportunity prior to the FM event occurring to reasonably speaking, manage and treat the risk.
• BT
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2020-04-29 14:33:13
Hi
! disclaimer - I don't know anything about Australian law !
but I don't see how option a) can be reasonable.
Risks can appear as time goes by due to changing circumstances and something that is not reasonably foreseeable at one point in time could well be later on.
• World Commerce & Contracting
•
2020-05-05 07:35:51
My apologies for the delayed reply to your question.
In general, the clause is referring to an issue that you could reasonably have anticipated and therefore could have prepared for it in some way. That means not only before inception of the contract, but also during its performance.
Even in a case where Force Majeure applies, there is a duty to take reasonable measures to mitigate its effects.
In the case of the pandemic, there are many debates over whether and in what circumstances it represents a Force Majeure event. However, even when disallowed, there may be grounds for claiming frustration of contract or impossibility of performance due to related events.
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