Reducing the risk of a natural disaster being a business disaster

The recent earthquake and subsequent tsunami in Japan has, in addition to the destruction of lives and property in Japan, left many businesses operating in the UK with a substantial headache: how to manage the disrupted supply of parts normally produced in Japan.

Recent announcements from Toyota and Nissan, confirming that they are suspending production or taking other measures as a result of the effects of the disrupted supply chain for their UK manufacturing plants, has brought this issue in to the public eye.

The suspension in production highlights 2 contractual issues: (1) what obligations and/or rights do you have in your commercial contracts in the event either party to the contract is delayed from fulfilling a contractual promise? and (2) are your employee contracts sufficiently flexible to permit the suspension of manufacturing (or other measures) and the consequent reduction in working hours (please click here for further information on the employment contract issues).

So, in the scenario where supplies are affected because of an earthquake or other natural disaster, the key to whether any party to a contract may be liable for breach of contract in respect of any delays occurring is usually down to the drafting of the “force majeure” clause.

This is a clause that is found in most contracts and provides a mechanism for the party that would otherwise be in breach of contract to;

(1) suspend its responsibilities under the contract for such time as the event continues to occur or to affect its responsibilities; and
(2) avoid liability for any breach of contract arising as a result of the delay/failure to comply with any contractual term.

So essentially, force majeure clauses provide the parties with valid excuses not to comply with their side of a contract.

Typically such clauses would include references to acts of God, riots, floors and war. Many clauses will go in to much more detail and care should be taken when this list of events is drafted. There is a risk that one event could be missed, and that the inclusion of one event excludes others. Encompassing language is often included to cover such other circumstances as “may reasonably be outside the parties’ control”.

Force majeure clauses are found in most contracts, including business to business and business to consumer contracts. For business to business contracts, the force majeure clause must be reasonable in the circumstances. For business to consumer contracts, the force majeure clause will be subject to a reasonableness and fairness test. These tests are provided for under statute and can not be excluded.

A well drafted force majeure clause can protect a business and assists a business to manage the fall out following an event outside it’s control.

The key to ensuring your business is protected when force majeure events such as the recent earthquake and tsunami occur are good written contracts with reliable and well drafted force majeure clauses.

Written by Matthew Read, a Solicitor in the Nelsons Commerce and Technology group. To find out more about our Commerce & Technology group, click here.