Force majeure: what procurement needs to know

Force majeure (meaning superior force when translated from French) has long been a standard clause in commercial contracts. Its use in contracts can be traced back all the way to Ancient Rome, but it holds just as much significance today, remarked CIPS trainer and commercial legal expert, Kurt Warren FCIPS.

“The law stated that the impossibility is the limit of obligation – a key phase especially when we think of an agile supply chain," explained Warren.

In basic terms, the clause defines the circumstances under which a party may be excused from performing contractual obligations due to events beyond reasonable control. As defined on the CIPS Intelligence Hub:

"[Force majeure] is a type of contract clause that seeks to exclude or limit liability in the event of circumstances beyond either party's control. Force majeure events need to be genuinely unforeseen and unpreventable, and refer to things like earthquakes, eruptions or tsunamis. Force majeure events need to be explicitly outlined within the contract."

It is of little surprise then, that the clause has come under sharp focus for procurement, supply chain and legal teams when managing commercial contracts in recent years. Several shocks have upended the supply chain status quo – from war in the Middle East and Ukraine, to Covid-19 and Brexit – leading to many CIPS members being met with the challenges created if suppliers invoke the clause.

Is it force majeure, or illegitimate loophole?

Simply because a supplier has invoked force majeure doesn’t always mean it’s legitimate. There are often misconceptions as to its full meaning, so an understanding of the basic elements is important.

Warren explained that there are ultimately two broad categories under force majeure – “natural disasters” and “disruptions that are caused by human activities”.

A tsunami or global pandemic would fall under natural disasters, whereas the Middle East conflict where shipments and energy facilities are being targeted would come under the second category of “human activities”. Though there is no general definition, there are three core characteristics to a force majeure event:

1. External: generated outside the party’s control – negligience or mismanagement disqualifies the claim
2. Unforeseen: not something reasonably expected or previously experienced
3. Impossibility of performance: it is genuinely impossible to perform contractual obligations – this is different from alternatives being difficult or expensive

The critical point is that force majeure is different from another contract clause “hardship” – a point Fatima Balfaqeeh, an independent arbitrator and legal consultant based in the UAE, was keen to underline. This is where confusion can arise.

Procurement should be aware of the differences, Balfaqeeh advised, as the legal outcomes can be consequential. “One of them [force majeure] results into direct termination with no harm to either party, and the other one [hardship] actually obligates one of the parties to bridge the harm by giving some sort of compensation to allow for this hardship to be eased out and for the performance of the actual contract.”

The devil is in the detail

What about if suppliers don’t admit to hardship? Warren advised that this is where your pre-contract planning counts: “Part of creating the contract is actually understanding the supply chain, and therefore, what is [the supplier’s] agile approach regarding to if there is a problem and working out what hardship, financially primarily, would be involved.”

So, how can procurement distinguish between legitimate force majeure and opportunism? Balfaqeeh and Warren both emphasised the need for evidence to prove there is a legitimate claim, while all speakers agreed that holding strong relationships with suppliers also plays an important role in avoiding complex legal challenges in the first place.

Getting force majeure protection isn’t automatic and the burden of proof falls squarely on the party trying to renege on a contract. A written notice and provision of evidence would generally be required within 24-72 hours of a force majeure claim, with a temporary pause being the most common outcome – for example, deadlines pushed back for the duration of the event. Evidence is required to prove that there are no alternatives, with a cool-off period of between 60-90 days to show other options have been tried.

What’s the practical advice?

Force majeure is complex – 62% of attendees said they were “not sure” when asked if force majeure provisions in their contracts had been sufficient to manage the disruption caused by the Middle East crisis. Balfaqeeh noted that it is increasingly being drafted with greater strategic importance since covid-19, while there are differing interpretations between countries and local laws.

One misconception is that governments do not have to announce that there is a force majeure for the clause to be invoked by suppliers in a region, she added.

The practical implications of force majeure depend on the details in your supplier agreements and what may have been defined during the drafting process. The increasing use of the clause puts a growing emphasis on understanding risk profiles, mapping your supply chain, real-time risk monitoring, conducting supplier site visits and audits, the diversification of supply and transportation networks and that clear and specific language in relation to force majeure events is embedded in your commercial contracts.

Approach force majeure as a “WE” problem

Warren offers some final advice: force majeure is a reactive approach and ultimately damages supplier relationships with a business impact to both parties. Instead, procurement and supply professionals should invest in working with all elements of the supply chain to adopt an agile and proactive approach.

1. A contract is not a weapon or a get-out-of-jail-free card. A partnership agreement is a partnership agreement.
2. Buyers and suppliers must be proactive in managing the relationship, risk management and recognise that isn’t “them” or “us” that has a problem – it’s “WE”.
3. This perspective drives a robust business relationship and an agile supply chain.

Watch the full webinar back here: The Middle East conflict - implications for supplier relationships and contracts

Looking to upskill you and your team’s contract management capabilities? Book a CIPS contract management course today.