Outsourcing: 'Force majeure' is written into many
contracts, but it is a mistake to treat it as a boilerplate clause.
It is vital that definition and terms are spelt out
clearly.
Like so many things left to chance, the modest clause of "force
majeure" is written into the terms of many IT outsourcing, credit
card, lease, insurance and financial contracts, and could be a
disaster just waiting to happen.
So what is force majeure, and why is it sometimes overlooked for
serious consideration when spelling it out could benefit both the
supplier and the customer?
Force majeure is often defined by lawyers as an event or
circumstance which is beyond the reasonable control of the party
affected, and which is without fault or negligence. It therefore
extends to such matters as riot, war, hostilities and, as we saw on
a huge scale in 2005, floods.
However, the scope of the clause is usually widened, mainly by
suppliers, to cover eventualities they believe to be outside their
reasonable control, or factors that pose a risk, and have not been
factored into the contract price. It is this scenario that can
sometimes cause the parties to focus (often contentiously) on this
type of clause in the contract.
It is important that the parties ensure the terms of force
majeure are clearly defined, with the rights and obligations of
both parties expressly stated.
This transparency will enable them to administer the contract
more effectively when events covered by the clause occur and can
shield the affected party, to a certain extent, from some claims
that might otherwise be brought against it.
Although force majeure is a commonly used clause, its importance
is sometimes disregarded, when it is seen as mere "boilerplate". It
is also an important issue with regard to the continued growth in
offshoring and nearshoring, particularly because of a number of
risks that are not usually seen in, or associated with, the UK.
There is no general concept of force majeure set down in English
law, which is why the clause needs to be expressly included in
contracts.
The contract negotiation process should set out the allocation
of risks in detail so it is clear which risks are borne by the
supplier and which by the customer.
A similar analysis needs to be undertaken in respect of the
scope of the force majeure clause and the associated consequences,
should circumstances occur where it might come into effect.
The scope of the clause is a matter for negotiation. Usually, a
customer will be looking to focus the scope of the provisions more
narrowly, especially if the supplier is more likely to benefit.
The two aspects of the operation of force majeure clauses that
therefore need to be considered in more detail are: the scope and
definition of force majeure events, and the effect on and
obligations of each party if a force majeure event occurs.
A supplier may wish to expressly reserve itself a right to an
extension of time if a force majeure event affects its ability to
perform the service.
During that extension, the customer may have to manage with a
limited service provision or none at all. It must also be
remembered that events giving rise to delays in providing a
contracted service that occur in certain countries might last
longer than similar events in Europe and the US, so both parties to
a contract should agree about what is an acceptable time-period
before the delay triggers alternative measures to come into
force.
The force majeure provisions must also take into account the
interaction with any disaster recovery and business continuity
obligations, so that they are not unintentionally negated.
Although force majeure is only one area of a contract that needs
to be considered, it is important when considering risk
allocation.
Catastrophic events such as the 9/11 terrorist attacks in the
US and the Asian tsunami disaster have brought force majeure,
disaster recovery and business continuity back into focus.
The interaction between these concepts needs to be given serious
consideration, to ensure that the consequences of events turn out
as both parties have planned for.
Richard Ellis is a senior consultant with outsourcing
adviser Quantum Plus, and Jagvinder Kang is a solicitor and
director with specialist IT law firm Technology Law
Alliance