Insight
Publish date
1 July 2024
Force majeure and business continuity in commercial agreements: Lessons from recent global disruptions
In an increasingly interconnected and unpredictable world, businesses face a growing array of risks that can disrupt their operations and contractual obligations. The COVID-19 pandemic, geopolitical tensions, and extreme weather events have highlighted the critical importance of robust force majeure clauses and comprehensive business continuity provisions in commercial agreements.
Understanding force majeure
Force majeure, French for “superior force,” is a contractual provision that excuses a party from performance when extraordinary events beyond their control prevent them from fulfilling their obligations. Traditionally, force majeure clauses have covered natural disasters, wars and other extreme events. However, recent global events have prompted a re-evaluation of what constitutes a force majeure event and how these clauses should be drafted.
Key elements of a force majeure clause
A well-drafted force majeure clause typically includes:
1. Definition of force majeure events
2. Notification requirements
3. Mitigation obligations
4. Consequences of invoking force majeure
5. Duration and termination rights.
Lessons from the COVID-19 pandemic
The COVID-19 pandemic exposed weaknesses in many existing force majeure clauses:
1. Ambiguity in Language:
Many clauses did not explicitly mention pandemics or public health emergencies, leading to disputes over whether COVID-19 qualified as a force majeure event.
2. Government Action vs. Direct Impact:
Questions arose about whether it was the pandemic itself or subsequent government actions (lockdowns, travel bans) that triggered force majeure.
3. Foreseeability:
As the pandemic progressed, courts began to consider whether subsequent waves were foreseeable and thus potentially excluded from force majeure protection.
4. Long-term Disruptions:
Traditional force majeure clauses often assumed short-term disruptions, leaving parties uncertain about their rights and obligations during prolonged crises.
Post-pandemic force majeure drafting
In response to these challenges, many organisations are revising their force majeure clauses in a number of ways. Firstly, they are explicitly listing pandemics, epidemics, and public health emergencies as force majeure events. Additionally, they are including provisions for partial performance or modified obligations during prolonged disruptions. Organisations are also defining specific triggers or thresholds for invoking force majeure, such as official declarations by health authorities. Furthermore, more detailed requirements for notifying counterparties and taking steps to mitigate the impact of force majeure events are being incorporated. Lastly, provisions for regular reviews and updates to the force majeure clause are being added to address emerging risks.
Beyond force majeure: business continuity provisions
While force majeure clauses address unforeseen events, business continuity provisions focus on maintaining operations during disruptions. These provisions are becoming increasingly important in commercial agreements, especially for critical suppliers and service providers.
Key elements of business continuity provisions
Effective business continuity clauses often include several key elements. These encompass obligating parties to conduct regular risk assessments and share results, as well as requiring the development, maintenance, and testing of comprehensive business continuity plans. Such clauses typically define essential services or products that must be maintained during disruptions and include provisions for alternative suppliers or subcontractors in case of disruptions. Specific requirements for data protection, backup, and recovery procedures are also commonly incorporated. Additionally, these clauses establish clear communication channels and responsibilities during disruptions. Lastly, they often allow parties to audit each other’s business continuity preparations to ensure compliance and readiness.
Integrating force majeure and business continuity
While force majeure and business continuity provisions serve different purposes, they are increasingly being integrated to provide a more comprehensive approach to risk management in commercial agreements. Contracts may specify different levels of disruption, with business continuity measures applying to lower-level disruptions and force majeure for more severe events. Force majeure clauses can reference business continuity plans as part of the required mitigation efforts. Additionally, relief under force majeure may be conditional on having implemented and followed agreed-upon business continuity measures. Furthermore, both force majeure and business continuity provisions can be subject to periodic review and update to address evolving risks.
Industry-specific considerations
Different industries face unique challenges and may require tailored approaches to force majeure and business continuity. In manufacturing and supply chain, the focus is on alternative sourcing, inventory management and transportation contingencies. For technology and SaaS companies, emphasis is placed on data security, system redundancy, and service level agreements during disruptions. Financial services sectors pay particular attention to regulatory compliance, cybersecurity, and maintaining critical financial operations. In healthcare, provisions are made for surge capacity, supply of critical medical equipment and maintaining patient care during crises. Energy and utilities industries focus on infrastructure resilience, emergency response, and maintaining essential services.
Legal and regulatory considerations
As force majeure and business continuity provisions evolve, several legal and regulatory considerations come into play. Courts generally expect parties to take reasonable steps to mitigate the impact of force majeure events, and business continuity measures can demonstrate this effort. Some industries have specific regulatory requirements for business continuity planning, which should be reflected in contractual provisions. Contracts should clearly address liability and potential indemnification related to failures in business continuity measures. Additionally, business continuity provisions must account for data protection laws, especially when involving cross-border data transfers during disruptions. Lastly, collaboration on business continuity, especially involving alternative sourcing, should be mindful of antitrust regulations.
Negotiation strategies
Negotiating effective force majeure and business continuity provisions requires a balanced approach. Parties should consider how risks are allocated between them and whether this aligns with their relative ability to control or mitigate these risks. It is important to balance the need for clear, specific terms with the flexibility to address unforeseen circumstances. Defining clear thresholds for when force majeure can be invoked or when business continuity measures must be implemented is crucial. Negotiations should be approached as a collaborative effort to enhance overall resilience, rather than a zero-sum game. Finally, involving risk management professionals, industry experts, and legal counsel in the negotiation process can provide valuable insights and expertise.
Implementation and ongoing management
Effective force majeure and business continuity provisions require ongoing attention. It is crucial to ensure relevant personnel understand the contractual provisions and their responsibilities through training and awareness programs. Regular testing, including periodic tests or simulations of business continuity plans and force majeure scenarios, is essential. Organisations should extend business continuity requirements to key suppliers and sub-contractors as part of comprehensive supplier management. Clear records of risk assessments, continuity plans, and any invocations of force majeure must be maintained. Finally, provisions should be regularly reviewed and updated based on lessons learned from actual disruptions or simulations, as part of a continuous improvement process.
Conclusion: preparing for an uncertain future
The global disruptions of recent years have underscored the importance of robust force majeure and business continuity provisions in commercial agreements. As businesses navigate an increasingly complex risk landscape, these clauses serve as critical tools for managing uncertainty and building resilience.
Moving forward, organisations should approach force majeure and business continuity not as mere legal formalities, but as integral components of their overall risk management and business strategy. By carefully crafting these provisions, companies can enhance their ability to withstand disruptions, maintain critical operations, and emerge stronger from crises.
The most successful approaches will likely involve a combination of clear, comprehensive contractual language, practical business continuity planning, and a culture of ongoing risk assessment and adaptation. As the business world continues to evolve, so too must our approach to managing risk and ensuring continuity in our commercial relationships.
By investing time and resources in developing strong force majeure and business continuity provisions now, companies can better position themselves to navigate the challenges of an uncertain future, maintaining their competitive edge and preserving valuable business relationships in the face of adversity.
At Thomson Snell & Passmore, we understand the critical importance of keeping your commercial agreements finely tuned to address potential disruptions and protect your business interests. Our experienced team can help ensure your contracts include robust force majeure clauses and comprehensive business continuity provisions tailored to your specific needs. If your company requires guidance or assistance in reviewing, drafting, or negotiating commercial agreements to enhance resilience and mitigate risks, please do not hesitate to reach out to us.
Sebastian Jones, Partner in the Commercial Team at Thomson Snell & Passmore, explores the evolving landscape of force majeure and business continuity in contracts, drawing lessons from recent global disruptions and offering insights for future-proofing agreements, in a recent article for Insider Media.
