E-Sourcing Forum » Force Majeure

Force Majeure

January 21st, 2009 at 07:32am Paladin Associates - Barb Ardell

The current economic situation is challenging sourcing professionals in many ways. Force majeure is one issue that may present new challenges in today’s business environment.

The Yale Law Library describes force majeure as follows:
Force Majeure literally means “greater force”. These clauses excuse a party from liability if some unforseen [sic] event beyond the control of that party [emphasis added] prevents it from performing its obligations under the contract. Typically, force majeure clauses cover natural disasters or other “Acts of God”, war, or the failure of third parties–such as suppliers and subcontractors–to perform their obligations to the contracting party. It is important to remember that force majeure clauses are intended to excuse a party only if the failure to perform could not be avoided by the exercise of due care by that party.

A sales colleague of mine lost his job recently when a customer invoked force majeure and walked from the contract. The customer’s industry has been hard hit by the economic downturn and they believed that constituted force majeure. The seller chose not to pursue the issue legally.

Might this clause also be applied on the buy side in today’s circumstances? One could easily envision a manufacturer unable to fulfill orders without the short-term credit necessary to purchase raw materials, leaving the buyer scrambling for substitutes without economic recourse. Could a buyer also use this clause to his/her advantage to avoid “take or pay” penalties when demand for a supplier’s product is reduced due to the economic crisis? Applicability would, of course, be dependent on the exact wording of the clause.

Donald Trump recently invoked force majeure to delay loan repayment on a Chicago condo development. “’Would you consider the biggest depression we have had in this country since 1929 to be such an event?’ he asked in an interview, adding, ‘A depression is not within the control of the borrower.’” The lender’s attorneys disagree calling this claim “laughable”. Obviously, there is no clear legal opinion.

My associate, Rob Patton, commented that the situation is not completely unprecedented. “I recall that force majeure was very much in vogue in 1973-74 during the first ‘oil shock’. Many suppliers used it to renege on supply commitments, put buyers on allocations, etc.”

As sourcing professionals strive to manage risk, we must take a broad view and consider the applicability of this common clause to the current economic situation. At the same time, we must recognize that contracts cannot anticipate every eventuality. This means that we must truly understand our strategic suppliers’ situations (including their supply chains). This will help us to take preventive actions where appropriate. However, we must also maintain constructive relationships with these suppliers so that when the unexpected occurs we can negotiate win-win solutions. As Rob Patton points out, “The legal side becomes very academic when you start shutting plants down for lack of supply. At that point who cares who wins legally ten years down the road!”

Have you encountered a claim of force majeure in the current economic downturn? If so, please share your experience with us. Opinions are also welcome.

Barb Ardell – Paladin Associates

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Entry Filed under: General, Supply Management Best Practices

8 Comments Add your own

1. Jeff Gordon | January 21st, 2009 at 9:02 am

Barb: As I’ve stated in numerous posts on related topics here and on other blogs (including my own), I think it’s dangerous to tie the current economic situation to a particular contractual provision or attempt at recourse.

The simple truth is that hardly anyone anticipates something as severe as a depression – but it is able to be anticipated. Force Majeure clauses (in most cases) aren’t written to allow for “economic downturn” … it’s not something that NO ONE can anticipate. So, if you look to things like cell phone contracts, you’ll find business downturn language in almost all of them – people take the time to consider what happens when you get rid of a bunch of employees and don’t need as many cell phones.

(I don’t know the specifics of the Trump situation) but to think that he would try to invoke FM to get himself out of a deal IS quite laughable. This man is an EXPERT in finance, deal making and the economy. He should very well be able to understand what happens if he can’t sell the units. If he was really concerned about it, he should’ve included language to that effect. But it’s still not FM.

So again, I renew my caution against trying to use contractual provisions outside their intended scope – it’s a factor in bloated and unruly contracts. Rather, you should consider all reasonable angles and draft appropriate language. If economic downturn isn’t something you thought of – well, what you’re left with is common sense and camaraderie. In other words, call the other side up, explain the situation and see if you can work together to get yourself out of the jam.

But remember that they can say no. Also, suppliers should remember that decades of “sticking it” to customers can come back to bite them if they try to renegotiate supply contracts with their customers. So the lesson to learn here is to treat each other with respect and integrity – so that when something like this happens, both sides are inclined to try to help the other out.
2. Dick Locke | January 21st, 2009 at 9:18 am

Two comments:

1. I’ve never heard of a force majeure clause including suppliers failing to deliver. I would automatically reject that one if a seller proposed it.

2. Fixed quantity contracts for commodity items such as cell phones and computer memory are unwise in an environment where the buyer can’t forecast well. Share of business contracts coupled with frequently updated forecasts work much better. You don’t have to be defensive about not meeting quantity commitments, you don’t have to take products you don’t need and you have protection on the upside.
3. Barb Ardell | January 21st, 2009 at 10:45 am

Hi Jeff,

Thanks for taking the time to comment. I think we’re in agreement. I’m not suggesting that we, as buyers, invoke FM due to the current economic situation. However, we cannot control whether our suppliers do. In contract negotiations, we cannot anticipate every situation . Ongoing, we must be attuned to risk and take appropriate steps to mitigate. However, we may ultimately need to rely on our ability negotiate a win-win in difficult circumstances. Suppliers will certainly be more agreeable if we have a history of fair and reasonable dealings.

Thanks for sharing your perspective and starting the dialog.

Happy sourcing!
4. Jeff Gordon | January 21st, 2009 at 12:43 pm

Hi Barb:

Sorry if it sounded like I was slamming you for endorsing it. Rather, I was pointing out that most well-crafted FM clauses should never find their way into being interpreted as including economic downturn, as economic downturns ARE foreseeable activities.

Thus, if someone wants to protect themselves from continued contractual obligations in the event of depression, I recommend an economic downturn clause which details the scope of what would happen during such depression… but that in no event should an FM clause attempt to be read to include a depression.

I also agree that suppliers will be more agreeable if we have a history of fair and reasonable dealings. I just think it a little odd that NOW is when they’re looking for help…and that as recently as a year ago, the same suppliers were doing everything they could to extract every last penny out of most customers (extra/silly fees, etc). I guess I’m just having a hard time feeling sympathetic.
5. Barb Ardell | January 21st, 2009 at 1:07 pm

Great perspective and advice! We all need to remember that we reap what we sow.

Regards,
Barb
6. Purchasing Certification BlogPurchasing Certification Channel | January 21st, 2009 at 4:43 pm

Within a Force Majeure clause, it is helpful to provide examples of what Force Majeure is as well as specific indications of what it is not. Including a phrase like “For the purposes of this agreement, economic downturn will not be considered to be a Force Majeure event” would be helpful in avoiding complications.

Economic downturn is more often cited in “Material Adverse Changes” clauses, though those clauses are more common to mergers and acquisitions than to procurement. However, that doesn’t mean that they shouldn’t be used to a greater degree.

Trump probably didn’t have a MAC clause so he resorted to invoking FM because their was sufficient ambiguity that may give him a leg (regardless of how weak) to stand on.
7. Diane Santos | February 24th, 2009 at 7:04 pm

The Government has been using a form of this clause for years in DOD contracts. Specifically EPA (Economic Price Adjustments). When a commodity is volitile, an EPA clauses will set forth the parameters of when the clause can be envoked. It is used for certain things such as the price of oil, gold, etc. I see no reason why it could not b e tailored to other makets/commodities, as well.
8. Tammy J | March 16th, 2009 at 4:08 pm

Very soon, our U.S. government, along with the “powers that be,” will declare a “force majeure” and the U.S. dollar will be worth nothing. There will be rioting in the streets. Have a 30-day supply of food on hand, and be prepared to accept a new form of currency, the amero.

This will be another robbery against the hard-working U.S. citizens- just like all the stock/401K $$ that “disappeared.” Where did all those funds go??? Rip-off, bigtime.

We are in for “change” alright, and it ain’t going to be pretty, people.

Wake up, get away from the TV screen long enough to research what is happening.

Google “North American Alliance” and “illuminati.”

Don’t blame the whole mess on Bush- he IS in on it, and so is Big O’brother bama…they have been planning the grinding down of America into the dust for years. The prez is just a puppet that follows instructions- the current one is sure moving along with it all pretty fast, though.

China will be the next superpower, and we are going to be 3rd-world status.

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