Posts Tagged ‘Force Majeure’

Force Majeure Provisions in Outsourcing Contracts

Tuesday, January 20th, 2009

Last week, I provided a general overview of some of the compelling reasons for outsourcing at E-Solutions Integrator.  Outsourcing contracts need to be carefully negotiated as problems can have a huge impact on the company that outsources.

Lawyers tend to use the same  boilerplate provisions despite the type of contract.  That can be a killer in an outsourcing transaction.  For example, one provision that should be carefully reviewed is the force majeure provision.

Force majeure literally means “greater force.”  Force majeure excuses a party from liability or from performing its obligation if some unforeseen event or circumstance beyond that party’s control prevents it from performing as required under the contract.  Thus, force majeure clauses commonly cover Acts of God, such as natural disasters, war, strikes or labor unrest, riots, and the failure of third parties (e.g., subcontractors, suppliers) to perform their obligations to the contracting party.

When negotiating an agreement to outsource on behalf of a client, one should read and limit the list of categories under which force majeure may be claimed.  Sometimes, the vendor’s contract provides includes an unnecessarily broad list.  Additionally, one should limit the duration of any enforced delay.  Consider how long a force majeure event lasts.  Forever?  If so, no one will provide the service.

A force majeure event for one of the vendor’s other customers should not be a force majeure event for your client.  Further, one should make a distinction between a supplier and a subcontractor, the latter typically being more easily and quickly replaced.  Depending on the type of contract, one should consider whether the failure of a supplier should be a force majeure event.

Force majeure events should not include power or equipment failures.  The vendor should have immediate backups when these events occur.  Similarly, software defects should not be force majeure events.

When a force majeure event occurs, it should not relieve the vendor from implementing its disaster recovery plan.  In fact, it must do so when such an event occurs.  The client should have its own business continuation plan as well.  The client should have insurance If the risk can’t be minimized in a particular area.

The Black Book of Outsourcing: How to Manage the Changes, Challenges, and Opportunities and The Outsourcing Handbook: How to Implement a Successful Outsourcing Process are good places to start when considering an outsourcing arrangement.