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Force Majeure: A Contentious Issue

November 21, 2011

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.

Please add your thoughts and experiences.

  1. selvaraja permalink

    Hardship is a generally recognise concept in GCC but it opens the pandora box in contracts executed in asia-pacific. For example, during my tenure as a legal/contracts manager for a substantial part of the construction of Kuala Lumpur Internation Airport (KLIA), Haze occured for almost 45days. Work at site was stopped/delayed/rescheduled for health and visibility reasons. The issue was, is Haze a FM or Harship. It was was definely an hardship but it was decided, not FM. Todate, I am still not sure whether the decision was correct.

    • Thanks for offering this example.

      In the end, do you feel the decision made a difference to the outcome, or was it actually of no great relevance except in the history of case law?

  2. John permalink

    Conversely to ‘hardship’ provisions, there is the concept of ‘hell or high water’ clauses, and so the spectrum of contractual treatment should be addressed having regard to the criticality of the deliverables in the first instance. ‘Hardship’ (suggesting that the performance has not been made impossible due to the unforseen event outside of the parties control i.e. FM) needs to be understood by the ‘self enforcing range’ of the agreement, as the point where the spot-market pay off of breach (efficient breach) is greater than the continuing performance and relational pay-off in the marketplace.

    All of this points to an increasing need for a relational approach to contracting, even in some commodities, not only due to globalisation but the increasing risks to supply chains as a consequence of global climate change.

  3. selvaraja permalink

    The decision did make the contractors unhappy but some additional monetray allowance was made on other legitimate EOT grounds as compensation to close the matter.

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