Supply Chain Woes? Get Force Majeure Protection with Contract Analytics
Manage supply chain risk at scale with help from AI
When COVID first caused global alarm with government-mandated shutdowns, travel holds and mandatory lockdowns, companies scrambled to review supply chains to address disruptions to critical supply lines. The cancellation of major events wreaked its own havoc on buyers and suppliers, forcing parties to lean on specific wording in agreements to determine contractual responsibility.
One global example is the annual Mobile World Congress (MWC Barcelona), an event that welcomes more than 100,000 attendees and 2,400 vendors to Barcelona each year. Conference organizer, GMSA, made the cancellation announcement just two weeks before doors were set to open. As part of that, the GMSA had to review all of its vendor contracts for force majeure clauses.
What is force majeure?
A force majeure clause is a contract provision that relieves parties from performing their contractual obligations when certain circumstances beyond their control arise – circumstances that would make performance inadvisable, illegal, or impossible.
While force majeure provisions can vary greatly depending on the contract language used, they typically cover several event types that could impact suppliers and customers across the supply chain. The provisions generally include a list of incidents that may be considered a force majeure event under the contract, covering natural disasters, acts of God, and acts of government.
Manage supply chain risk at scale with contract analytics
Supply chains are becoming more and more complex, so sourcing and procurement managers need to manage risk at scale. In times of disaster, it’s not a question of if the supply chain will be impacted, but a matter of when and to what degree. None will go unscathed, which is why proper negotiation and the drafting of a force majeure clause is necessary in agreements.
When companies wish to invoke the force majeure provisions of a contract or they receive a force majeure notice from a supplier, it can be very labor intensive to conduct the necessary contract reviews. Supply chain teams have to quickly discern what the provision allows and if the current situation is covered. But for those that have embraced contract analysis technology, there’s a silver lining.
With a contract analytics platform in place, organizations are better equipped to identify force majeure provisions within their contract portfolios and understand specific obligations to customers and suppliers. And time may be of the essence, too. Contract language may include time-stringent reporting and additional disclosure of information, including the number of impacted facilities, when the force majeure event occurred and when it’s expected to conclude.
Are you covered?
To benefit from a contractual force majeure clause, parties should ask themselves:
- Is the event in question covered by the clause? In other words, does the clause apply in cases of delay or only where performance is impossible?
- What are the contractual notification requirements?
- Does the clause have specific contract language related to business continuity and if so, is force majeure relief still applicable?
Outside of maintaining proper force majeure provisions to protect your supply chain, teams can go a step further to prioritize risk management in any crisis. One way to do so is to build a business continuity task force and have a contingency plan. The best supply chain teams attempt to foresee risk when possible and have measures in place for when disaster strikes. Consider the following:
- If a distribution center goes down, for whatever reason, how will orders be fulfilled from customers across warehouses?
- Who will handle chains of escalations, and how will supply shortages be allocated across customers?
- What are the locations of your first, second and third-tier suppliers, and have you built a plan for alternate sourcing?
Remember, supply chain implications and planning apply to far more than present pandemic challenges. Think back to the devastating flood in Houston in 2017, the 2020 Taal volcano eruption in the Philippines, Hurricane Sandy of 2012, and the impact of Hurricane Katrina in 2005 on oil supplies. Recently, the giant container ship Ever Given got stuck in the Suez Canal, blocking 400 other ships from delivering goods. Supply chains were affected globally. In all these cases, air freight, ports and railways were involved – all key parts of supply links whose operations were impacted.
No one expects these events to occur, but when they do, you need to be prepared and take proactive steps to mitigate risk. Learn more about protecting your organization from supply chain disruption exposure in this webinar.
Webinar: May 20th at 1 pm ET
In this webinar, you'll learn to:
- Use contract analytics to analyze a full range of procurement contract provisions in a fraction of the time of traditional manual review
- Leverage AI-powered insights to facilitate triage, risk mitigation, and decision-making processes
- Build a central repository of contract data to identify risks, find cost-saving opportunities and provide rapid responses to inquiries and sudden changes