Using a force majeure clause

Tuesday, July 1st, 2014

This area is a minefield and, if you get it wrong, you will undermine your contract.

If worded badly, a “force majeure” clause can provide a huge loophole to legally excuse contract performance. The parties in a contract must know the precise definition, scope of its usage and limitation of the clause. A brief definition of force majeure is

“irresistible compulsion or coercion”.

In 2002, in the case of Mamidoil-Jetoil and Moil-Coal v Okta, the judge stated that force majeure could only be cited to excuse performance of contractual obligations in circumstances where events are outside the control of the contractual party.  In other words, the clause can only be brought into play when events could not have been avoided or mitigated by reasonable steps by the party concerned.  The clause can be written to include provisions for the buying company to claim relief from liability for its non-performance.

We will, however, focus on what you must take into account in offering the supplier the provision of force majeure. Here’s 5 points to inform your thinking on how to set up and use Force Majeure clause:

  1. Your definition. When writing a contract, you should define a force majeure event and detail the causes that will meet such an instance. You should take legal advice on this, considering acts of God, war or armed conflict, acts of terrorism, acts of government, earthquake or disaster. If your supplier wants these included in a force majeure clause, you should ask for the supplier’s risk mitigation strategy to deal with each circumstance. They should have such a strategy and this will help you decide whether to include the specific event.
  2. Events to be rejected from the clause. There are some events that should be rejected, such as the supplier claiming a shortage of skilled labour and failures in his subcontractor’s supply chain. You should also reject strikes, floods and fire on the basis that there should be a risk mitigation strategy capable of being implemented at very short notice.
  3. Supplier obligations. The clause should include a requirement for the supplier to alert your company to a force majeure situation within, say, 48 hours of it happening. This notification should include details of the occurrence and evidence of its effect on the obligations of the supplier, who should also set out what they are doing in mitigation. The two parties should meet soon after the event to discuss terms to mitigate the effects and facilitate the continued performance of the contract.
  4. Termination. You should include a provision to terminate the contract if, for example, the force majeure event continues for a longer period than, say, 28 days. This mechanism will need to state how many days’ notice – for example, 14 days – should be given to terminate the contract. It is probable that some compensation may be due to the supplier and this will need to be set out in the contract.
  5. Mitigation. Your organisation must also have a mitigation plan, in case it has to terminate the contract.  In addition, it is advisable to see your legal services department when you have collected the relevant information.

5 areas to focus on in the use of a Force Majeure clause. What have I missed?

So here’s the lesson:

If you’re unsure about the Force majeure clause you’re using, there’s probably a decent reason.

And you may well find, like me, that by finding a way to make your Force Majeure clause more useful to the Buyer (and the Supplier) you’ll find the contract performance benefits.

And the Supplier will pay a lot more attention to it.

And they’ll help you deliver your required outcomes.

That can’t be bad.

– Ray

What about the most favoured nation clause?

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