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Does COVID-19 Activate Force Majeure in Your Contracts?
Check your contracts and you will find that the vast majority contain a force majeure clause. This provision states the conditions by which a party does not have to perform under the contract if it experiences an event beyond the party’s control.
The force majeure (FM) clause contains the conditions under which FM may be invoked by the vendor or customer and may also include various remedies such as termination of the agreement if the FM event continues beyond a specified amount of time.
With global supply chains ground to a halt during the coronavirus/COVID-19 crisis, many customers are – or should be – reviewing their vendor agreements for FM language to assess potential vendor non-performance. This is where the language contained in your FM clause becomes crucial. FM clauses are often worded in general, broad and sweeping statements that can be interpreted widely by the parties, usually benefitting the vendor. Let’s look at the Force Majeure clause in Oracle’s standard Transactional Oracle Master Agreement (TOMA):
12. FORCE MAJEURE Neither of us shall be responsible for failure or delay of performance if caused by: an act of war, hostility, or sabotage; act of God; pandemic, electrical, internet, or telecommunication outage that is not caused by the obligated party; government restrictions (including the denial or cancellation of any export, import or other license); other event outside the reasonable control of the obligated party. We both will use reasonable efforts to mitigate the effect of a force majeure event. If such event continues for more than 30 days, either of us may cancel unperformed Service Offerings and affected orders upon written notice. This section does not excuse either party’s obligation to take reasonable steps to follow its normal disaster recovery procedures or Your obligation to pay for Products and Service Offerings ordered or delivered.
I’ve highlighted some keywords in the clause above to home in on our specific question related to the coronavirus crisis. First, note that “pandemic” is specifically called out in Oracle’s FM clause. In my experience, this is above and beyond what most FM clauses contain in their lists of specific FM triggering events.
But how is “pandemic” defined? Is an event required to be labelled a pandemic by an official organization such as the WHO or CDC? If a pandemic is declared by Oracle, are their geographical limitations that restrict Oracle’s ability to cease delivery of contracted services under the TOMA? Left unanswered, Oracle will likely defer to the Entire Agreement clause to retain abilities to decide for themselves:
9. ENTIRE AGREEMENT 9.1 You agree that the Master Agreement and the information which is incorporated into the Master Agreement by written reference (including reference to information contained in a URL or referenced policy), together with the applicable order, are the complete agreement for the Products and/or Service Offerings ordered by You and supersede all prior or contemporaneous agreements or representations, written or oral, regarding such Products and/or Service Offerings.
As written, if the agreement does not provide the requisite details to dig deeper by the customer in order to establish reasonable operating parameters, Oracle will reserve this right for themselves.
Also note that Oracle reserves extremely broad rights under FM by stating that FM includes:
other event outside the reasonable control of the obligated party
Here we go again ... How is reasonable defined? And on it goes. Now is the time to identify the key vendors upon which you depend from a supply chain perspective. Pull the master agreements and assess your FM risk as well as potential alternatives should a disruption seem possible.
Many organizations are likely to see force majeure invoked as a result of the coronavirus outbreak as containment measures intensify over the coming weeks and months. Customers need to hold their vendors to account. Simply invoking FM does not mean the vendor can simply wait out the event. In fact, firms must communicate these issues to their customers and provide information for how they are attempting to resolve the issue.
If you are currently negotiating a vendor agreement, consider these key points as related to force majeure:
- Specifically identify the coronavirus event and establish operating parameters for how the agreement will be impacted currently and as conditions improve or deteriorate further.
- Ensure the FM clause applies to both parties, whereby the customer may invoke FM on their obligations as well as the vendor.
- Lock down the list of FM events to specific items not outside a party’s control; jettison the “… other event outside the reasonable control …” language.
- Add appropriate rights to terminate the contract or to obtain services from an alternative vendor within a set timeframe.
Disclaimer: This note is not legal advice and should not be construed as such. While Info-Tech is providing general advice in this regard, clients should consult with their lawyers to obtain advice specific to all contractual language.
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