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Force Majeure: A Contentious Issue

Published: 15 Nov 2011 Average Rating: unrated Print
 
This article appeared in Contracting Excellence magazine on 15 Nov 2011 view edition
 

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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