For manufacturers, an interruption in production can quickly escalate into a major supply problem. Many are quick to declare ‘force majeure’, and expect that their customers will be patient until the problem is fixed. However, if you do not have adequate force majeure protection in your contracts then you have no legal right to use ‘force majeure’ as a defence.
Why do you need a force majeure clause?
A force majeure clause which excuses performance of a contract following the occurrence of certain events (for example, storms, floods, or terrorist activities) is normally considered to be a ‘boilerplate’ clause and not given very much attention. However, force majeure can be very important to a manufacturer when an unexpected incident occurs which might give rise to an failure or delay in fulfilling contractual obligations. When such an incident arises, manufacturers face unique challenges around the point at which a glitch on the production line becomes a force majeure event and how to deal with customers when that happens.
If a contract does not include a force majeure clause then you will be contractually liable for any failure or delay in performance caused by an event beyond your control. The only legal protection will be if the contract is ‘frustrated’.
However, the threshold to establish frustration is so high that it is not advisable to attempt to rely on frustration alone as a way of being discharged from liability for unexpected events. Instead, a suitably worded force majeure clause should always be inserted.
When is an event beyond your reasonable control?
Many force majeure clauses apply when an ‘event beyond the affected parties reasonable contract’ occurs. This will always be a question of fact and will depend upon the specific circumstances of the incident. Where the delay or failure relates to issues in production or logistical issues such as extreme weather causing delays in delivery, you will need to consider whether you could have taken any reasonable steps to avoid the issue. For example, could you have stock piled product to cover any outages?
Could you have put in place back up delivery plans or could you have undertaken more routine maintenance of your machinery?
How do you deal with it?
Presentation is everything. The issues around declaring force majeure can be serious; it could cause irreparable harm to your commercial relationships and reputation. If you seek to rely on a force majeure clause then you must generally use this as a last resort.
Look at all of your contracts. Do they specify how and when notice is required, do they specify whether you should apportion remaining product fairly and equitably or are you required to prioritise certain customers?
A well drafted force majeure can significantly reduce your contractual liability should an event beyond your control occur.
- Check your standard contractual terms contain a force majeure clause.
- Check the list of examples and obligations included in the force majeure clause; ensure that they cover the issues which could actually affect your business.
- Tread with caution when issuing force majeure notices – take legal advice early in the process to minimise claims for breach of contract