Business Risks are Evolving Rapidly.
Undoubtedly, GCs, CLOs, and Legal Ops professionals need to research their existing contracts, templates, and policies in order to mitigate today's risks – but moving forward, there’s no better time than now to prepare for the next "act of God." In addition to instabilities caused by politics, the climate and other factors (e.g., energy supply), we continue to see major emerging and re-emerging infectious disease outbreaks. In other words, the science is telling us that there will be more force majeure events:
Further, epidemics in particular have proliferated as people move and travel at greater rates across our globalized economy:
What is Force Majeure?
The phrase “force majeure” is used to refer to the risk that performing or completing a contractual obligation will be prevented or delayed because of circumstances or events beyond a party’s control. Typically, a force majeure event is characterized as an “Act of God” (e.g., natural disaster). Many commercial contracts include a force majeure clause to excuse either one or both parties from fulfilling their part of a contract.
Negotiating force majeure can become challenging when the event in question is new, or a party seeks undisturbed performance. To that end, organizations may want to limit force majeure completely.
One issue with the Australian brush fires and COVID 19 is that the implications are far-reaching and the impacts to supply chains were largely unexpected given the underlying event. Without a defined negotiation process, many contracts may end up with no applicable force majeure clause.
How to Set Up a Force Majeure Playbook
Here’s a quick guide on how to set up your playbooks and a process for dealing with future events.
Step 1: Identify Vulnerabilities
The first and most important consideration is your company’s position on force majeure - specifically, mapping positions across contract types is priority 1. You’ll need to clarify your preferences in simple terms for your team. For example, if you have a vulnerable supply chain, you may want to limit parties from claiming force majeure events. On the other hand, your organization may want to leave open the possibility of cancellation events or delays, subject to certain exceptions, such as payment. If you're executing a large number of catering or event contracts as an organizer, you'll want to balance key events with reality.
Allocating risk is tricky, especially in complex contract negotiations.
TIP: catalog previous redlines and sort them by topic. Reach out for a quick demo on how to automate position building and identify your playbook in real-time.
Step 2: Define the Issues
Next, layer your playbook with these key issues:
- Performance Release Trigger
- Full List of Events*
- Catch-all Language
- Notification Obligations
- Mitigation Requirements
- Impact on Limitations on Liability
- Impact on Cap on Liability
* When listing force majeure events, best practice is to be specific. However, there are unintended consequences of using "catch-all" language. In some jurisdictions, using catch-all language and a list might narrow the scope of the catch-all language to only similar events.
Details matter! In the Fukushima Daiichi nuclear disaster in 2011, was the nuclear disaster caused by the tsunami or... the earthquake?
Step 3: Document Positions and Scenarios
Once you've mapped context and the issues to each contract type, the next step is to chart out your positions in an easy-to-use format. Need a team building exercise that make this process easier? Check out this blog post on how to design and create a contract playbook in a few hours.
- Preferred Provisions, Provisos, and Exceptions
- Acceptable alternative
- Scenario focused fallbacks
- Red flags
Again, context is important when creating a force majeure playbook. Best practice is to include previous examples of force majeure events as well as "lessons learned" as you draft your playbook. The more specific you can be with drafter's notes and deviation guidance, the better.
Step 4: Iterate and Improve
One of the biggest challenges we hear with creating and iterating on playbooks is the need to keep them up to date. After all, who has time to work on playbooks? Check out this blog post on how and why you should use software to ease the burden.
The most important step in creating your force majeure playbook is to make sure you're planning and communicating the structure with your team and setting out key parameters in an overall contract playbook for each specific contract type.
In recent surveys we’ve sent out to our clients, 67% of communications from the GC level are lost at the bottom of inboxes. That means you will need to use multiple methods of communication to make sure everyone in your company is aware of your updated playbook. You should also communicate updates with your clients and suppliers so they're aware of your stance on force majeure and how it will impact contracts moving forward.
Nobody predicted just how much global businesses would be impacted by the events of early 2020. As you work on updating your playbooks, utilize a mix of people and technology to stay abreast of changes, lessons learned, and best practices.