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Force majeure clauses should be focussed and used to cement, not undermine, customer relationships, says expert

Out-Law Analysis | 06 Oct 2011 | 12:40 pm | 3 min. read

OPINION: Things go wrong in business – what matters is how a company reacts when they do.

One of the biggest questions following a business facing some kind of disaster is does it try to fulfil a contract or rely on a contractual get out, such as a force majeure clause. It is a far from simple question.

Companies must be very careful about using these clauses – not only are they hard to enforce but they could leave a company facing wider damage to its business than they might realise. It is far better to try to work out a commercial solution with customers that avoids the use of the clause at all.

Most major contracts for goods or services will have a clause that says if something totally out of the ordinary and unexpected happens, the supplier is released from its obligations to hold up its end of the bargain. This clause, called 'force majeure', is not usually about the the price of paper rising or logistical difficulties increasing – it will usually only be triggered by major and unpredictable events such as destructive freak weather, wars, embargoes or terrorist attacks.

Oil giant Shell used a force majeure clause when a fire shut down one of its refineries in Singapore last week. The fact that it hit the headlines that the clause was even used gives an indication of what a serious decision it is for companies.

It might look like a a no-brainer: if something happens that gets you off the hook, why not use it? But it is important to think of the long term consequences of being seen to use the clause too readily.

Not only will you be running the risk of being seen as too quick to try to avoid contractual responsibilities rather than trying to sort things out, but you will be leaving valued customer in the lurch and also potentially highlighting flaws in your own disaster recovery systems. Worse for your long term business, you will be letting competitors in the door to build their own relationships with your client base. Who is to say they'll come back to you when you are ready to supply again?

The time to think about these short and long term implications is not when disaster strikes, but much earlier, when you are actually drafting the clause in the contract.

At the contract negotiation stage actually look at your force majeure clause. These are usually boilerplate clauses copied from one agreement to another with little attention from either party. Look, though, at what you are saying: if the clause is broad and general you are saying that you want, in lots of circumstances, to be allowed to get out of your end of the bargain.

This is not likely to create the sense of trust and mutual reliance that lies at the heart of the best business relationships. So why not think harder about what circumstances will actually require you to use the clause and try to strike a balance? If you draft a more focussed clause that outlines more precisely the situations in which it will be used and negotiate that with your customer, actually using it will be less likely to cause commercial or legal problems.

If the worst happens and you need to consider using this clause, take time at this stage to think about alternative ways deal with the problem. Discuss alternatives with the customer to enforcing the clause.

If a problem cannot be dealt with internally so that some action is required, consider discussing with the client the options available such as sharing costs related to the issue, perhaps on a sliding scale. You could even work with customers to identify alternative suppliers, but for a fixed period only.

All of this can be done with the force majeure clause in the background to back up your bargaining position, with you making it clear that you will have to use it if reasonable alternatives cannot be found. This can only be the case if you are absolutely sure that the situation will activate your particular force majeure clause.

How you make these approaches must depend on the kind of relationship you have with your customer. A legalistic approach might involve making these suggestions on a 'without prejudice' basis, meaning that any concessions you make cannot be used to undermine a more unyielding position taken in court at a later date, but the nature of some relationships may demand a less formal approach.

Mo Bhaskaran is a litigation and arbitration specialist at Pinsent Masons, the law firm behind Out-Law.com