Following legal issues related to supply chain management.

Wednesday, October 29, 2008

Boilerplate clauses can be more trick than treat

Happy Halloween! That cute little gremlin at your door is just a boilerplate clause in the contract with your leading supplier. You know which agreement I mean — the one where you get all your mission-critical raw materials. Who even reads those things anyway? They are buried on page twenty with all the other little ghosts and goblins, e.g., the choice of law clause (see earlier post on the UCC), the severability section, the publicity notice . . .all very innocuous, right? Take a closer look. There really is a monster under that costume, and its name is the force majeure clause.

Force majeure literally means "greater force" and in the supply contract arena, it typically denotes a provision that excuses a party’s performance when unforeseen circumstances occur that inhibit such party's ability to deliver what they have promised. Just today I was reading an article in Nation's Restaurant News about the effect of weather on seafood production and shipments. It seems that an unusually busy hurricane season has wreaked havoc with many restaurants’ supply chains. The Uniform Commercial Code (a set of uniform rules enacted in all states that govern commercial contracting) even provides a free pass to parties when force majeure events occur that render performance by a party "impracticable". (See UCC Section 2-615). The typical clause might say something like:

"The undersigned agree that no party shall be liable for its failure to perform its obligations hereunder during any period in which such performance is delayed by extreme weather, fire, war, embargo, riot, labor strike, or any other event or condition outside the reasonable control of such party."

These clauses garnered some attention after the September 11 attacks, and then returned to relative obscurity. Given the current economic environment, we can expect to see them invoked more frequently by defaulting parties proclaiming the transactional equivalent of "the dog ate my homework". (We have a newly adopted rescue pup, and this no longer seems to be as lame of an excuse as I once thought.) If you want to avoid being on the losing end of this scenario, it may be time to pay some attention to the boilerplate clauses in your contract. Consider customizing the force majeure clause in your key procurement contracts to exclude things that sophisticated manufacturers and distributors should actively be managing around, including known risks in your particular industry. An emerging trend is for suppliers to develop, and commit to follow, detailed contingency plans. You may want to ask your suppliers for copies of their disaster plans and review them for sufficiency and practicality, then make the accepted plan part of your contract.

Just be prepared, your customers may start asking the same thing of you.

-- Heather Mallard


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