In the last year, OEMs have seen a wave of force majeure claims from suppliers who failed to meet their agreements to deliver items on time; many have been attributed to pandemic-related disruptions. As described by Law360, force majeure (FM) contract clauses, also known as “excusable delay” or “excusable nonperformance” clauses, are meant to “allocate risk for events that are not within the reasonable control of a party, [and they] generally excuse performance when it is delayed or prevented by such events.” Historically, the most common events triggering FM claims are natural disasters such as hurricanes and earthquakes.
In the wake of the pandemic and subsequent FM claims, there has been much discussion (and arguing) over whether the pandemic met the conditions of FM clauses. And much commentary can also be found on whether supply chain disruptions that arose indirectly from the pandemic—such as the semiconductor shortage—can result in FM relief for suppliers.
Regardless of how such potential disputes are handled, supply chain managers should be reviewing what their contracts with suppliers say about FM events and revising those clauses if necessary. In this blog post, we describe some factors to consider and some best practices for writing or refining FM clauses.
To start with, if you don’t currently have FM clauses with suppliers, these should be incorporated at the next renewal period or at another reasonable time interval. Along with other contract provisions—such as requiring disclosure of lower-tier suppliers and sites that your supply chain depends on, development of business continuity plans (BCP), etc.—a robust FM clause can help manage risks in your supply chains.
Important elements of a strong FM clause include requiring suppliers to:
- Notify your staff of a FM event and whether it is impacted within a specified time frame, such as 24 hours.
- If impacted, to provide a target recovery time, i.e., how long it estimates until it returns to pre-FM run rates.
- Identify best known alternate sites and/or alternate sources for your parts and materials within a specified time period, say 60 hours.
- Implement its business continuity plan (BCP).
- Use best efforts to recommence performance as soon as possible, to limit the effect of the FM event on its performance and to mitigate potential damages.
While FM clauses can’t protect your company from the impacts of FM events on your supply chain, they can be used to hold suppliers accountable for making their best efforts to keep you informed and to be as responsive and effective as possible in their recovery efforts.
FM events will continue to disrupt supply chain long after the pandemic has receded. In fact, the last year has seen many other major FM events. A major one was Hurricane Laura in August, 2020, which shut down 10% to 15% of the U.S. production of polyethylene and polypropolyene, raw materials for a vast range of goods and packaging. Large polymer producers from LyondellBasell in Louisiana to Chevron Phillips Chemical in Texas declared the hurricane a FM event. Then a few months later, the deep freeze hit Texas and triggered another round of FM declarations from companies making these and other polymer materials.
Building effective FM clauses into contracts, along with multi-tier supply chain mapping and risk management, can make your supply chains more resilient over the long term.