Don't let the unexpected ruin a relationship

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Don't let the unexpected ruin a relationship

Richard Ellis & Jagvinder Kang

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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


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This was first published in February 2006

 

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