As a result of recent natural disasters and political uncertainties both in the United States and around the globe, companies throughout the automotive industry are experiencing disruptions in their supply chain. These disruptions have reinforced the importance of a carefully-drafted force majeure clause to protect against unpredictable and potentially devastating forces beyond the control of a company or its suppliers.
Force majeure clauses are usually located in the “boilerplate” terms of a contract, and are commonly disregarded as standard, nonnegotiable legal terms. However, the force majeure clause of a contract is just as important as other business terms in establishing the risks and obligations under a contract. A force majeure clause excuses parties from performing their obligations under a contract when unforeseen and uncontrollable events render one party unable to perform. “Force majeure” events may include fires, natural disasters and other “acts of God,” as well as wars, terrorist attacks and other similar events.
To protect supply chains and minimize liability, parties should be sure that their force majeure clauses address the risks that would actually impact performance under the agreement. Some force majeure events, such as fires, natural disasters and wars, apply to nearly every party to any type of contract. However, some parties may become unable to perform their contractual obligations due to other events beyond their control, such as denial or cancellation of a necessary license, strikes and other labor disputes other than those of the contractual parties or unavailability of certain raw materials.
A force majeure clause should specify the effect of a force majeure event, including each party’s rights and obligations, based on the needs of the parties involved. A force majeure clause will generally excuse the party who is able to perform from its obligations when a force majeure event occurs. Some force majeure clauses excuse the nonperforming party from all liability as a result of the force majeure event, while other clauses hold that party liable for any additional expenses caused by its nonperformance.
While a force majeure clause typically applies to a supplier who is unable to deliver products or provide services due to a force majeure event, a customer will want to ensure that it also excuses the customer from any obligations it may have under the contract, such as obligations to make minimum purchases. Additionally, a customer will want to be sure that the force majeure clause adequately protects the customer’s interests if a supplier cannot perform its obligations. For example, if a contract requires a customer to purchase certain products exclusively from the supplier, the customer will want to ensure that the customer may purchase the products from alternative sources if the supplier cannot deliver the products due to a force majeure event.
If a contract does not have a force majeure clause, the Uniform Commercial Code allows a supplier to delay delivery of goods or not deliver goods at all if delivery becomes “impracticable” due to either (1) the occurrence of an event that the parties assumed would not occur or (2) compliance with governmental regulations. While this does provide some protection to a supplier, it leaves significant room for disagreement between the parties. In contrast, a well-drafted force majeure clause provides both clarity and certainty with respect to the particular risks that apply to the supply chain.
Force majeure clauses should be tailored to the needs of your particular business, the sensitivity of your supply chain and the risks associated with the automotive industry. Your contracts should include force majeure clauses that clearly and fully address risks specific to your supply chain and industry, thereby limiting your potential liability, helping you retain the integrity of your supply chain and keeping your business moving forward as efficiently as possible. Attorneys at Warner routinely work with companies throughout the automotive industry, in those companies’ capacities as both suppliers and customers, to review and draft force majeure clauses and other terms and conditions tailored to the specific needs of their businesses. To learn more, please contact a member of our Automotive Industry Group.