Customer Considerations For Negotiating Force Majeure Provisions
Clients often ask me what a Force Majeure clause is. It is a contract provision that allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.
The clause involves situations such as natural disasters, prolonged shortages of supplies, unanticipated or unpredictable government action, and much more. Parties negotiating a contract are free to define force majeure events at their choosing. Ultimately, events that are unforeseeable, unpredictable, and not contemplated by the parties at the time of contracting can generally fall within the force majeure realm.
As an example, in February 2017, it was reported that the world’s largest publicly traded copper producer, Freeport-McMoRan Inc., declared force majeure on nearby deliveries of copper concentrate from its mine in Indonesia’s Grasberg mineral district (one of the world's largest copper deposits). It was reported that Freeport-McMoRan provided notice to smelters in Asia with deliveries scheduled for first quarter that Freeport-McMoRan could not guarantee when shipments would be made. Freeport-McMoRan issued a press release indicating that the root cause of the force majeure declaration was an impasse in negotiations with the Indonesian government in relation to new Indonesian regulations. Considering that consumer electronics, municipal infrastructure and industrial facilities are heavily dependent on copper; the impact of this force majeure declaration affected a broad array of supply chains.
The concept of force majeure is often expressly included in a contract for the sale of goods, primarily to protect the supplier by excusing the supplier from performing its obligations under the contract under certain conditions outside the supplier’s control. As a result, the supplier’s nonperformance does not constitute a breach of contract, and the customer is not entitled to any damages for breach. This is all well and good for suppliers, but there are other stakeholders affected that need to be considered. For instance, what about the customers? And for further example, what about the smelters who have contracts with Freeport-McMoRan? Below are a few issues to consider when negotiating force majeure provisions in a contract for the sale of goods:
Require a robust business continuity plan and limited force majeure rights. Critical suppliers should have in place a strong business continuity plan and limited force majeure rights, particularly if that supplier has exclusivity rights. Review the business continuity plan closely to make sure that single localized catastrophic events will not render the supplier unable to perform.
Require that the supplier notify the customer as soon as possible of the force majeure event and its anticipated duration. In the example above, Freeport McMoRan’s customers who are expecting shipments received notice, but the notice did not explain how long the force majeure event would last. Requiring that the supplier provide detailed information to the customer in a force majeure event will limit this uncertainty and could lessen responsibility for damages due to providing more clarity of notice.
Include an allocation provision. In the event of a shortage of supply, the customer will want to include an allocation provision that requires the supplier to deliver a certain percentage of the available supply to the customer (as compared to the supplier’s other customers).
Inquire into rights under the UCC. The UCC, specifically code § 2-615 provides that when a supplier’s performance has been made impracticable, the supplier’s delay in delivery or non-delivery in whole or in part does not constitute a breach, so long as the supplier allocates the goods among its customers in any fair and reasonable manner and notifies the customers timely of delay or non-delivery and the customer’s allocated share. If the contract includes robust notice and allocation provisions (as described above), but does not expressly limit the supplier’s rights under the UCC, the customer might still find itself in a dispute over sufficiency of the force majeure notice or the customer’s allocated supply. The safest bet is to expressly state in the contract that UCC § 2-615 does not apply.
Require that the supplier reimburse the customer for any additional cost of mitigation in excess of the contract price. A customer might turn to other suppliers for goods in a force majeure event in order to mitigate its damages or enable itself to perform under its own contracts. The customer will want to ensure that it has reimbursement rights from the original supplier, which may include but are not limited to finding an alternative supplier, shipping costs, packaging, etc.
Provide for termination without liability to the customer if the force majeure event is uncured. If the force majeure event lasts for longer than a certain period of time, the customer might want to find an exit right from the contract. If the contract does not otherwise include a termination for convenience without penalty provision, a termination provision in the force majeure clause will achieve the same result.
The big issue here is not only crafting a proper force majeure clause, but also entertaining other collateral provisions in the contract to allocate for specific instances and rights that will be associated with a force majeure event. Good practice is to contact an attorney for review, drafting and even negotiating certain rights that will be needed to obtain many of the benefits discussed herein.