Be honest. Did you even read the force majeure provisions at the back of your last outsourcing or services contract? Did the lawyers even negotiate it, or did someone simply verify that, “Yes, there’s a force majeure provision in the deal?”
Prior to the unforeseen and calamitous events of September 11, 2001, no one would blame you if the answers to both of these questions were “No.” After all, none of those force majeure events ever happens, right? Tragically, we learned on that fateful morning that such events can occur, and the impact on your company can be enormous.
The “typical” force majeure provision in any contract for any product or service usually looks something like this:
“Neither party shall be liable for any delay in, or failure of, its performance of any of its obligations under this Agreement if such delay or failure is caused by events beyond the reasonable control of the affected party, including but not limited to any acts of God, governmental embargoes, restrictions, quarantines, strikes, riots, wars or other military action, civil disorder, acts of terrorism, rebellions or revolutions, fires, floods, vandalism, sabotage or the acts of third parties.”
Now that you have read it, do you see the problems with this clause if you are a buyer of information technology or business process services? From the buyer’s perspective, there are two principal problems with agreeing to the traditional force majeure provision in the aftermath of 9/11. I call them the “cause” problem and the “effect” problem.
The “Cause” Problem
The “cause” problem has to do with the causes of force majeure, or the composition of the force majeure themselves. These events can be divided into four basic categories:
- Those “physical” events that are foreseeable, although unpredictable, such as fires, floods or vandalism.
- Those day-to-day “business” events or governmental actions that cannot be forecast, but which are foreseeable, such as strikes or regulatory activities. This includes your service provider’s subcontractors and vendors not performing tasks possibly necessary to your provider’s performance under the agreement that your provider may claim are “beyond its reasonable control.”
- Those events that, although admittedly still pretty rare, are now unfortunately quite plausible in a world where U.S. commerce is easily touched by international politics, such as military actions, embargoes, rebellions and terrorism.
- Those events caused by extraordinary elements of nature or “acts of God,” which are truly unforeseeable force majeure events.
The reality now is that force majeure events are not as unlikely to occur as we may have thought in the past, and any one of these force majeure events may affect your service provider and impact your company.
The “Effect” Problem
The “effect” problem is this: Suppose terrorists detonate an explosive device in the complex that houses your company’s outsourced data center and the blast destroys the data center. If your outsourcing agreement includes a force majeure provision like the one above, the explosion is clearly a force majeure event. As a result, your service provider is not liable for its failure to perform its obligations under the agreement.
At first blush, you acknowledge this appears to be fair because it is impossible to provide data center services at a data center that, through no fault of your service provider, no longer exists. This may be fair to your provider, but how fair is this outcome to your company? Your provider is not to blame for what happened, but the effect the loss of the data center will have on your company is clearly very significant. As a buyer of outsourced services, you cannot afford such a result, no matter what causes the interruption of these outsourced services. Buyers have to address their “post-9/11” force majeure scenario by something more valuable than simply letting the service provider off the hook.
Despite the broad acceptance that the traditional force majeure provision has gained over many years, it is outdated today and will be of diminishing value to customers of outsourcing and business process services over the next 20 years. What’s the answer?
New Ways to Look at force majeure
First, reclassify the current litany of force majeure events as either being:
- Relatively common events related to either business or governmental acts, or other foreseeable accidents or acts of nature.
- Uncommon events admittedly not within the parties’ control, but for which the parties must assume the risk of their occurrence.
- Truly unforeseeable events caused by extraordinary elements of nature or “acts of God.”
Second, instead of wholly relieving the non-performing party of any liability upon the occurrence of a “true” force majeure event, create a particular set of obligations and actions the non-performing party must undertake. The occurrence of the particular event triggers the performance of those new obligations as well as certain additional rights afforded to the buyer if such an event occurs.
A Sample of a New force majeure Cause
Those are the objectives of the following proposed “post-9/11” force majeure provision:
(a) Subject to paragraph (b) below, neither party shall be liable for any failure or delay in the performance of its obligations under this Agreement to the extent such failure or delay both:
(i) is caused by any of the following: acts of war, terrorism, civil riots or rebellions; quarantines, embargoes and other similar unusual governmental action; extraordinary elements of nature or acts of God (other than localized fire, hurricane, tornado or flood); and
(ii) could not have been prevented by the non-performing party’s reasonable precautions or commercially accepted processes, or could not reasonably be circumvented by the non-performing party through the use of substitute services, alternate sources, work-around plans or other means by which the requirements of a buyer of services substantively similar to the Services hereunder would be satisfied.
Events meeting both of the criteria set forth in clauses (i) and (ii) above are referred to individually and collectively as “force majeure Events.” The parties expressly acknowledge that force majeure Events do not include vandalism, the regulatory acts of governmental agencies, labor strikes, or the non-performance of third parties or subcontractors relied on for the delivery of the Services, unless such failure or non-performance by a third party or subcontractor is itself caused by a force majeure Event, as defined above. Upon the occurrence of a force majeure Event, the non-performing party shall be excused from any further performance or observance of the affected obligation(s) for as long as such circumstances prevail, and such party continues to attempt to recommence performance or observance to the greatest extent possible without delay.
(b) Notwithstanding any other provision of this Section, a force majeure Event shall obligate and require Supplier to commence and successfully implement all of the Services relating to disaster recovery set forth in the “Disaster Recovery Plan” attached hereto within the time period described therein. If a force majeure Event causes a material failure or delay in the performance of any Services for more than five (5) consecutive days, Buyer may, at its option, and in addition to any other rights Buyer may have, procure such Services from an alternate source until Supplier is again able to provide such Services, and Supplier shall be liable for all payments made and costs incurred by Buyer required to obtain the Services from such alternate source during such period. Buyer shall continue to pay Supplier the charges established hereunder during such period, but Supplier shall not be entitled to any additional payments as a result of the force majeure Event. If a force majeure Event causes a material failure or delay in the performance of any Services for more than thirty (30) consecutive days, Buyer may, at its option, and in addition to any other rights Buyer may have, immediately terminate this Agreement without liability to Supplier.
The new post-9/11 force majeure provision requires that the event impairing the non-performing party be “unforeseeable.” This requirement eliminates business and ordinary governmental actions, and common accidents or acts of nature.
Second, if an extraordinary event occurs, it is only characterized as a force majeure event if the non-performing party’s failure, not the event itself, could not have been reasonably prevented or circumvented. Third, upon the occurrence of a force majeure event, although temporarily relieved of its performance of the services, the service provider is nevertheless obligated to implement agreed upon disaster recovery services, and the buyer is afforded the additional rights of obtaining substitute service from another service provider and, ultimately, of terminating the agreement, if the force majeure event continues.
The bottom line is that after 9/11, you run your business in a “brave new world” having far greater and now more plausible business risks. Both buyer and service provider must assume such risks and fairly apportion them in an outsourcing contract. The practical effect of simply providing contractual relief to a non-performing service provider in such a contract, without providing the buyer adequate safeguards, is to thrust all of the business risk upon the buyer. Although this may have been acceptable at one time, it no longer is acceptable for buyers of complex outsourcing and business process services after 9/11. Force majeure provisions cannot merely relieve the parties of their obligations, should something “beyond their reasonable control” occur. Such provisions must now account for and apportion the business risks equitably between the parties, and describe the further respective responsibilities of the parties in the event of a disaster. After 9/11, simply declaring that neither of the parties is at fault is no longer an acceptable option.
Lessons from the Outsourcing Journal:
- After 9/11, buyers must revisit and reevaluate the risks and remedies provided by the force majeure clauses of their outsourcing contracts.
- Although the occurrence of a force majeure event technically relieves both parties of their performance, the practical effect is that the buyer has assumed all of the risk because it now has no service. The buyer should not assume all the risk if an unforeseeable event occurs. The new provisions should apportion risk equitably between both buyer and service provider.
Attorney Bruce Leshine provides legal counsel to buyers of ITO and BPO outsourcing services at Washington, D.C.-based Levine, Blaszak, Block & Boothby, LLP. His email is [email protected].
About the Author: Ben Trowbridge is an accomplished Outsourcing Consultant with extensive experience in outsourcing and managed services. As a former EY Partner and CEO of Alsbridge, he built successful practices in Transformational Outsourcing, Managed services provider, strategic sourcing, BPO, Cybersecurity Managed Services, and IT Outsourcing. Throughout his career, Ben has advised a broad range of clients on outsourcing and global business services strategy and transactions. As the current CEO of the Outsourcing Center, he provides invaluable insights and guidance to buyers and managed services executives. Contact him at [email protected].