When force majeure is not enough

Posted on 18 Feb 2014 by Callum Bentley

Thomas Eggar LLP partner, Stuart Padgham explains how to protect your supply chain interests in the event of a major international disaster.

Businesses are continually facing a wide variety of potential business interruption events.

Stuart Padgham, partner, Thomas Eggar LLP

These range from localised flooding, such as that which has affected the UK recently, to massive natural disasters such as the Icelandic ash cloud, the Japanese earthquake and tsunami of 2011 and the 2013 typhoon in the Philippines.  In a global economy, events many thousands of miles away can potentially affect your suppliers and your supply chain.

Accordingly, procurement teams will often carefully consider the resilience of their suppliers to such events and what plans they have put in place to deal with them.  However, often such planning is not adequately reflected in the supply agreement that is put in place with the supplier.  Often business interruption issues are only dealt with by means of a simple force majeure clause.

Force majeure clauses only excuse the supplier’s performance (when it is made impossible as a result of a defined force majeure event).  Accordingly, they are not that useful from a customer’s perspective as they usually do not contain any positive obligation on the supplier to plan for mitigating the risks of a force majeure event or putting in place a back-up plan in case one occurs.  In addition, suppliers will often seek to widen the range of force majeure events to include items (such as failures in their own supply chain) that are not true force majeure events.

In view of these limitations, it is important that procurement teams do not simply rely on the inclusion of a force majeure clause to deal with business interruption issues.  Instead, they should ensure that (where relevant) further obligations are imposed on the supplier to plan for potential business interruption events and to implement such plan effectively when one occurs.  Where the relevant services/products that are being supplied are of particular importance to the customer, then the customer should ensure that any Service Level Agreement that is entered into covers such business interruption planning activities and, in particular, the time by which the supplier should have recovered from any business interruption event.

By so doing, the customer will be in a position to ensure that the supplier is actively dealing with the business interruption event in a planned and professional manner rather than simply sitting back and claiming to be excused from performance as a result of force majeure.

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