With the ongoing West Coast labor dispute and increasing port congestion causing gridlock, suppliers should look to their contracts to determine whether they have the right to declare force majeure with their customers in the event of a supply chain disruption caused by the labor dispute. If there is a force majeure provision in the parties’ supply contract that covers labor disputes, then the supplier should determine what rights and obligations it has under that provision.
Force majeure refers to unforeseeable circumstances that prevent a party from fulfilling a contract. Common force majeure provisions may cover several categories of events that could impact the supply chain. The provision may cover risks that are reasonably beyond the control of the party claiming force majeure. Specific events that the provision may cover include: (a) natural disasters or “acts of God,” such as lightening, tornadoes, hurricanes, tsunamis, floods and earthquakes; (b) manmade disasters, such as plant fires or floods; (c) war and civil issues, such as riots, civil unrest, acts of terrorism; (d) labor disputes or strikes; (e) government embargoes or other government actions affecting the supply chain; and even (f) power outages or transportation issues.
It is important to note that even if a listed event occurs, the party seeking to invoke the force majeure provision must be able to show that there are no alternative means, increased costs notwithstanding, for fulfilling the contract. The event has to be one that prevents performance at virtually all costs. For example, if the supplier is able to timely deliver parts by using expedited air freight, even though this form of transportation is more expensive, the supplier likely will not be able to rely on the force majeure provision to suspend performance under the supply contract.
A well-drafted force majeure provision should include two key elements. First, the provision should define the events that constitute a force majeure. Second, the provision should set forth the supplier’s rights and obligations if a force majeure event occurs that impacts the supplier’s ability to timely supply parts. Both the defined force majeure events and their operative effect will depend upon the products at issue, the regions involved in the supply chain and risk allocation between the parties.
As a practical matter, when drafting a force majeure provision for a specific supply agreement or to include in a party’s standard terms and conditions, the contracting party should consider each of the events that it has defined as force majeure events and how it will deal with each event if it occurs. If the operative effect of the force majeure event is suspension of the supplier’s performance, the provision should spell out for how long the performance will be suspended. Some provisions will suspend performance until the event giving rise to the force majeure is over. Other provisions will suspend performance for a defined period of time and provide the parties the right to terminate the contract if performance has not resumed by the end of that time period. However, the provision may allow only the customer to terminate the contract in the event that the supplier suspends performance pursuant to force majeure. Finally, most force majeure provisions contain a notice requirement that obligates the supplier to provide its customer prompt notice of the event giving rise to the force majeure and the expected duration of the issue.