Thanks for your question. To try and answer succinctly, transferring assets to an outsource service provider naturally increases dependence and has the potential to increase propensity of opportunistic behaviour after the contract has been signed. Appropriate pricing mechanisms and performance incentives can mitigate this challenge and create an environment where innovation and continuous improvement is embedded in the relationship.
You may find this paper interesting as it looks into all of this:
I would also recommend reading IACCM's Supplier Led Innovation Research Report (there is also a webinar which takes you through the findings): www.iaccm.com/resources/;
It is a little difficult to be precise without knowing a bit more context but on the face of it, if all the sub-contractor is committing to do is to redesign any design which turns out to be faulty, that sounds incredibly restrictive. It means that all of the risk of delays and the additional cost of procuring and replacing the faulty element sits with the prime contractor.
Whilst it is normally reasonable for any specialist sub-contractor in that situation to look to cap their potential liability, I think you should expect the sub-contractor to at least bear some element of the resulting financial damage. The exact level of any cap is obviously a matter for commercial negotiation and the value of the sub-contract in question will have some influence on what that cap should be. One must also factor in whether a contract which simply limits liability to redesign would be subject to challenge. Again, this depends upon many factors but certainly under English law it is quite likely that a contract that accepts no financial liability beyond undertaking a redesign would not be enforceable.
If you are speaking with the sub-contractor, you might suggest a financial cap of some sort. Quite apart from improving the chances of the contract being upheld, such an approach shows confidence in the sub-contractor's abilities and makes concluding contracts easier (saving both time and money). I have also emphasised to clients in the past that increasing any cap on liability does not necessarily increase risk since risk is primarily a factor of how likely an event is to happen and if the likelihood is very low then increasing the cap has minimal impact on the level of risk.
The answer depends on the sub-contractor's remit of obligations. If the sub-contractor is designing the equipment, then the Contractor should ideally be able to flow down to the sub-contractor all damages incurred by the client up to an agreed financial Cap where the underlying cause is the sub-contractor. Sometimes this is not that easy to prove, though, if the design and manufacture are separated. It will also depend on the size of the sub-contractor as to the amount of liability it could reasonably absorb. Insurance may also be a relevant factor.
• TRADING AND AGENCY LTD
@ Anonymous • 2020-06-10 09:49:31
Thanks a lot for the response.
Notwithstanding my own confirmation bias, I fully appreciate the reasonableness in your response. It is quite difficult for me to understand why Engineering Subcontractors would limit their responsibility to just redesign and not take any responsibility/liability in rectifying the resulting damages such as procurement and reinstallation costs when actually their Professional Indemnity insurance is actually meant to cover such damages? Especially more so when Limitation of Liability provided under the insurance coverage is generally way higher than the value of Contract.
I suggest you start by reviewing the relevant Contracting Principle which you'll find at www.iaccm.com/resources/contracting-principles/
These principles are the result of cross-industry, buy side and Sell side reviews and therefore represent market norms. You can use these with your customer to explain that unlimited liability is not market practice.
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.
! 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.
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.
erdemir engineering management and co...
Hi Semih - great question, especially as I think that we're yet to see the full impact on many supply chains of this incident.
There will be many suppliers and their customers having discussions about the potential application of this clause. One of the most simple definitions from the internet is set out below :
Unforeseeable circumstances that prevent someone from fulfilling a contract.
It's instances like this where I go back to what was a watershed moment for myself and many others in the audience when Bruce Everett and Tim Cummins challenged the audience in New Zealand last year, asking why we spend so much time trying to get the best supplier on board to give us the best possible outcome - and then run straight to solicitors when something goes wrong. Perhaps now is that opportunity, if you haven't already adopted the IACCM contracting principles into documents, and think about how you might engage directly with suppliers and customers and hope that they remember back to when everyone was happy that both felt excited to be part of a new relationship - and how to maintain that through what might be a challenging time around the globe.
If you've got a strong relationship with some of your affected suppliers, no doubt you've had a chat already about this.
If not, then perhaps you could kick that off by extending out to them the olive branch to start these discussions.
Thanks for your post. I forwarded it to Tim Cummins, our Founder and President and he wrote this blog for you and others who are interested in the impact of the virus
• Parker Hannifin Corporation, Aerospace Group
I would say yes. This 'Act of God' is causing many companies to shut-down temporarily.
• GKN Aerospace
Yes - in most cases it will be ( unless of course the contract excludes medical issues or similar)
• Norfolk County Council
Might be worth considering what your response was to previous pandemic flu etc and treating similarly
yes, I considered a supervening fact, would be impossible to predict the existence and its effects when signing a Contract...
for me it depends, if the party is from Wuhan, China where the local authorities have declared shutdown or curfew then it may be considered. however if the party is from somewhere not directly impacted with the virus then No. They need to show evidences of the impact which is hindering their obligation to perform the work.
• Pacific Gas and Electric Company
I would describe COVID-19 as an unforeseeable event. It would depend on the nature of a unique good or service to determine if a force majeure clause would apply.
All depends on how your Force Majeure paragraph is drafted. Is your company qualified as "essential?" That could also come into play as well.