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Force majeure: minimizing your risk

July 1, 2006

3 Min Read
Force majeure: minimizing your risk

It''s hurricane season once again. Processors and resin producers alike are holding their collective breath hoping that a major catastrophe will bypass the Southeast U.S. coast.

However, when disaster strikes many companies have to declare what is known as "Force Majeure" in order to get relief from fulfilling contracts. Just what is force majeure? H. Alan Rothenbuecher, a partner in the law firm of Schottenstein, Zox and Dunn (Cleveland, OH), where he also chairs the firm''s Trade Secret, Restrictive Covenant and Unfair Competition practice group, says that the concept of force majeure generally refers to circumstances that are beyond the contol and fault of the company declaring force majeure.

It is an event that is both unforeseeable and uncontrollable, and the event must alter the assumption of performance, i.e. that resin producers can''t make and ship resin in accordance with their contracts. And it must show it undertook "reasonable counter-measures" to prevent losses.

Legitimate force majeure events include the SARS epidemic, riots, embargoes,fires/explosions, strikes/boycotts/ lockouts, or terrorist acts. Additionally, nonreceipt of materials from suppliers can be cause for force majeure. For example, says Rothenbuecher, "Lanxess''s suppliers declared force majeure due to the effects of Hurricane Katrina and pre-emptive shutdowns associated with Hurricane Rita, so Lanxess in turn, declared force majeure on its customers."

Rothenbuecher also provides examples of where force majeure was improperly used. Instances where a company''s declaration was not upheld included events relating to currency fluctuations, increases in market prices, foreseeable shutdowns of plants, and unavailability of preferred shipping methods. He questioned whether Nova''s recent declaration of force majeure due to mechanical problems affecting the restart of a plant in Canada would have been upheld on challenge. Mechanical problems in the start-ups of plants, he states, are generally the norm versus the unexpected. But, as he indicates, suppliers are rarely challenged.

Even so, a trap you can set for your suppliers is include a clause saying that they have to give you advance, written notice before declaring force majeure. "Review the contract you have with your suppliers," says Rothenbuecher. "Is there something there to help you? If not, change it and plan for the next time."

Planning for the future is key, he notes. Search for alternative sources or services. Have the supplier buy in to a contingency plan. "It''s about leverage," he says. "Here''s something you need to do. Prepare for the next time by negotiating and drafting a more favorable force majeure clause. Share the risk with suppliers and transfer risk to customers by including a clause in other contracts."

Always have a contingency plan in place, Rothenbuecher advises. "Purchase `business interruption'' insurance which covers lost profits and income when you''re forced to shut down," he says. "`Extra expense'' insurance covers the cost of having an alternative site until your original plant is rebuilt."

Another way to prepare for the future is to list specific force majeure events to ensure there are no gray areas, and describe how long performance will be excused. For example, you might have a clause in a supplier contract that states that when they are back to 50% capacity, they must ship to you, Rothenbuecher says.

Define the degree of interference required to excuse performance, and make bi-lateral clauses both upstream and downstream to cover this.

Describe your contingency plan. For example, "In the area of a subcontracting work, you might want to say `if I give you molds to produce parts, and something happens to your plant I can take back the molds until you''re up and running again.''"

In many cases of force majeure, the customers bear most of the burden. "Suppliers can hold you captive," Rothenbuecher states. "Negotiate your losses in advance."

Clare Goldsberry [email protected]

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