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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• IACCM
•
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
•
2015-07-29 02:08:46
Thanks Tim, good point.
•
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.
• -
•
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
• Allianz Technology
•
2019-01-10 08:45:28
Hi,
I'm just trying to understand your position.
Considering that you are managing all contractual relationship with another company (buy and sell side) sounds actually good from your company perspective. It would mean, that your leadership can expect you to have a full overview about the contractually back and forth with this JF. Therefore I assume it's hard to change the mind of your leadership, since I would expect them to see your doublerole as positive.
However on the other side, there is your personal position, meaning being something in the middle of a sandwich, right? I'm not sure about your empowerment, but in worst case you have also very limited authority to change some company rules (discounts, penalties, payment conditions, acceptance criteria etc.). And on buy side you usually have different contractual expectation than on sell side. I assume, this is the tricky part in your situation. Fulfilling the internal requirements for buy- and sell side with the same contractual partner at the same time (and maybe also your partner asks you if you are a bit crazy, since requesting sooo different contracts when you are either on sell side or on buy side).
When the conditions your company expect in contracts are very different on sell side and buy side, this should be communicated as an issue (to your leadership). I think there are 2 options as solution: either the requested second CM as you suggest, or an escalation to the leadership to align clear buy and sell conditions between your company and the JF, which are equal to both parties. such framework conditions would make at least your position more clear. And maybe there won't be anymore need of a split of the CM roles buy side and sell side?
Since I couldn't find many information in your post, I hope, this is somehow helpful?
If your uncomfortable position has other reasons, please let me know.
BR
Kristin
• Omaha Public Power District
•
2019-01-21 20:58:03
I probably would start collecting facts: Firstly, establish the relationship between Your Company ("Y Company") and Company X ("X Company") by looking at any specific, written agreement about the services ("X and Y Services"). Also, establish clarity around (1) Y Company's services to be provided to X Company, and (2) X Company's services to be provided to Y Company. At this point, are there any conflicts that you can see/anticipate in your ability as the Contract Manager during the provision of X and Y Services, that perhaps could result in non-performance or non-compliance? Also, how do you escalate and cure any issues of non-performance (for example)? Secondly, I would review the files documenting any legal review, if any, prior to said agreement being reviewed for signature/execution. Were there any concerns that were raised and eventually resolved (internally)? AT the very least, you could start with the resource allocation -- that is, regarding your time management and how to better allocate your skills - in developing your case. Hope this helps. Regards ~ Rose
• CoreLogic
•
2019-05-17 09:01:17
Its an interesting role and I recommend your decision to bring in another manager to take one of the contracts.
I would recommend to present this as two different roles:
On the buy side - Contract Manager would play role of a customer and to manage Company X, need to drive and establish Vendor Management Discipline around Contract Administration / Governance / Service Performance / Financial Management / Risk and Compliance
On the sell side - Contract Manager would play role of an engagement partner to drive business relationship / Value addition to Company X/ increase revenue generation from Company X to your company / Joint go-to-market strategy if possible.
Regards,
Dave
Replies: 3
• Schlumberger
•
2018-08-12 06:54:16
Hello,
Hello
Just in case you still need a few other pointers, consider the following:
One thing sales people understand is numbers so approach it from an accounting point of view. Since the contract is void, consider discussing the fact they will not be able to meet all the GAAP principles for revenue recognition and if your accounts folk are diligent they probably will back you up ( but run this by them - accounts - first. Companies interpret or apply GAAP revenue recognition differently ).
Since Company X no longer exists and as such has no contracting capacity, it cant assign/novate the contract which will impact collectability should the New Company choose not to follow through with what it has implied it would do re: payment
If you are required to create a new agreement using the same or similar terms and conditions, consider preparing a risk assessment analysis of the contract and let the stakeholders approve the risk they are taking on by utilizing the same Ts & Cs so everyone is on the same page. Whatever discussions or approvals were obtained for the former Company should not apply to the New Company.
All the best!
• Anonymous
•
2018-09-17 18:33:36
Thank you for the guidance Mofoluwaso Falade.
Replies: 2
• IACCM
•
2018-06-19 17:32:25
Hi Julia,
Based on IACCM´s contracting body of knowledge, we have conducted several ATEs and webinars stating the key steps for optimizing claim management transparent process.
Please refer to our IACCM library: www.iaccm.com/resources/contract-management-resources/ And in particular, in this topic: www.iaccm.com/resources/;
We will always recommend a constructive and non-hostile approach which will ensure we are improving quality and reducing the causes of counterproductive events.
However, if first level management cannot resolve the issue within a specified timeframe, it should be escalated to senior management. Only as a last resort should the agreement instruct the parties to resolve the claim by involving a third party. This could be either a court, an arbitrator or alternative dispute resolution, e.g. mediation.
In the absence of regulations in the agreement, most countries will have laws that similarly protect the injured party by third-party resolution. Both by law and under the terms of the agreement, therefore, claim management is not a voluntary process.
Let´s see if other members contribute with resposes in this forum, but I´d also recommend you, Julia, to join and connect with our IACCM community of interest created for this specific purpose: Dispute, Claim and Conflict Management: www.iaccm.com/gp/dispute
Best regards,
Pablo Cilotta
Replies: 1
• Telefonica
•
2018-05-15 17:52:16
There are a lot of aspects to consider here, for example:
are you buying a replacement service from another vendor? if so, do you need the current vendor to support transition to the new vendor?
does the current vendor need to return any confidential documents?
are all payments up to date?
are any contract penalties (service credits, LDs) outstanding?
Irrespective of the above, you need to formally terminate the contract, confirming that neither party has any liability to the other following termination, except, perhaps, confidentiality provisions and, potentially, any latent defect/warranty claims. Simply 'allowing' the vendor to walk away seems odd: you spent time (and therefore money) on-boarding them and agreeing a contract, it seems strange to end the relationship in this way.
• Neptune Marine Service Pty Ltd
•
2018-05-16 01:14:24
Hi Dale,
What contract states with regards to email communication and authorized representative. If the contract only states that communications shall be in writing to the authorized representative. The next question that will arise is Governing Law of the contract. As some countries have adopted the United Nations Commission on International Trade Law (UNCITL) published its Model Law on Electronic Commerce in 1996 which states that actions will not be invalidated or discriminated against merely because they were conducted electronically and emails are considered as a message in "Writing"
So, make sure the message in "Writing" based on the governing law is communicated to the Authorised Representative.
For the balance checks, I agree with Steve Grange and that shall suffice.
Regards,
Gaurav Seth
• Yorkshire Water Services Limited,
•
2018-05-16 14:46:50
Hey Dale,
I agree with Steve Grange. Create a formal Exit plan with the company to close off any outstanding liabilities to both parties. Regardless of each others 'mutual consent' to this. At the end of the that process formally close it off with a document. This will prevent anything coming back to bite you in the future.
Phil
• SIEMENS PTE LTD
•
2018-05-17 09:52:18
Dear Dale,
I agree with Steve, Gaurav and Phil, They have covered multiple aspects which we have to look at before letting the vendor walk off as I believe in this case Vendor has no financial impact on them so easy for them to walk off without formal termination/closure of the contract. But from the moment you accept or let Vendor walk out all the responsibilities more of liabilities fall on your company.
• Resolute Corporate Services Pty Ltd As Agent for Société Des Mines de Syama S.A (SOMISY S.A)
•
2018-05-25 11:43:20
I think you should prepare an official document signed by both parties to legally and lawfully end this contract by a mutual agreement by both parties.
• Resolute Corporate Services Pty Ltd As Agent for Société Des Mines de Syama S.A (SOMISY S.A)
•
2018-05-25 11:43:54
I think you should prepare an official document signed by both parties to legally and lawfully end this contract by a mutual agreement by both parties. your message
• Virgin Money
•
2018-06-04 11:15:31
Yes.
• Catalina Marketing Corporation
•
2018-10-25 20:59:16
The first item to consider is to ensure to review the Services Agreement and review the Termination and Notices Section and any others that may come in to play when terminating an agreement. Are there a certain number of days after written notification that the services agreement will terminate? Are you terminating a master agreement and any ordering documents or SOWs or either or both? Do you need to provide notice to the contractor via email, mail, certified mail, overnight delivery? Does your agreement allow for electronic transmission communication as an acceptable method of communicating to make it legally binding in a notices provision?
I then also check to see if there are provisions such as Confidential Information/Materials or any other security items that need to be returned to your company that would need to be mentioned in a termination agreement or letter. Is there any confidential information, materials, laptop/pc, security badges and property that need to be returned and when, how and to whom? These are a few of a number of items may need to be addressed in a termination agreement along with ramp down services and whether there are any fees apart from standard fees that would need to be paid to considered. I have seen termination agreements be very simple with little to no instruction since the Services Agreement was simple straightforward agreement with little to be exchanged by way of CI, materials, goods, security, property and others that can run a few pages of negotiated ramp down services, transfer of services to another contractor or training and payment of ramp down costs at stake.
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