For example, in a case in which the events listed in a force majeure clause pertained only to the party’s ability to conduct the day-to-day operations of its business, a New York appellate court held that the catch-all provision in the force majeure did not cover a non-performing party’s inability to obtain required insurance. Kel Kim Corp. v. Central Markets Inc., 519 N.E.2d 295, 297 (Ct. App. N.Y. 1987). In light of this holding and others like it, it is especially important for the parties to give due consideration to the force majeure clause’s list of specific events that will excuse a party’s non-performance.
Almost every force majeure clause includes the following on its list of specific events that will excuse a party’s non-performance: fire, flood, war and “acts of God,” the conventional definition of which is an “act occasioned exclusively by forces of nature without the interference of any human agency.” Black’s Law Dictionary (6th ed. 1990). The customer in an outsourcing or ASP agreement may wish to limit the scope of such terms, however, if the vendor’s non-performance would disrupt the customer’s business substantially. For example, a force majeure clause in a recent outsourcing contract stated the following:
By requiring that, to excuse the vendor’s non-performance, fires, floods or acts of God must be “severe,” this provision suggests that a power failure or road closure caused by an ordinary storm would not excuse the vendor’s non-performance.
Many customers often oppose the inclusion of “strikes” and “labor disputes” in the force majeure clause’s list of events excusing the vendor’s non-performance. When they consider this issue, customers should consider whether they would deem it unreasonable if, for example, they were unable to access their computer desktops because of a strike by their vendor’s employees.
Customers also should consider whether the vendor’s subcontractor’s non-performance should excuse the vendor’s failure to perform its contractual obligations. The generic force majeure clause quoted above does not squarely address this issue.
Although a court is unlikely to hold that a subcontractor’s non-performance falls within the catch-all provision, customers would be wise to expressly exclude this event from the scope of a force majeure clause’s protection by inserting the following language: “provided, however, that non-performance by the vendor’s subcontractors shall not excuse any delay or failure in performance by the vendor.”
To eliminate uncertainty about whether damage from computer viruses falls within the catch-all provision of the force majeure clause, the parties to an outsourcing or ASP agreement should allocate such risk expressly. Similarly, the parties should address the potentially harmful consequences of a telecommunications failure. For example, one recently negotiated outsourcing contract excuses the vendor’s non-performance if it is caused by “any interruption, failure or defects in Internet, telephone or other interconnection service or in electronic or mechanical equipment.”
The parties may wish to draft different force majeure clauses to apply to different obligations under the contract. For example, a customer whose business would be disrupted severely by the vendor’s failure to process electronic orders could bargain for a narrow force majeure clause applicable to that obligation, while accepting broader protection for the vendor with respect to training and professional services.
RELATIONSHIP TO SERVICE LEVEL AND TERMINATION CLAUSES
A service level agreement is typically an integral part of an outsourcing or ASP agreement. It sets forth the performance standards the vendor is required to fulfill for each product or service the vendor provides to the customer. Such agreements also define the remedies available to the customer if the vendor fails to meet the specified service levels.
The customer should be aware during contract negotiations that a force majeure clause offering broad protection to the vendor could potentially undermine the service level agreement. For example, a clause excusing a party’s non-performance “by reason of any cause beyond such party’s control” could render the service level agreement ineffective if the vendor argues that each and every one of its failures to meet a service level is excused.
On the other hand, the vendor should be aware that, if a service level agreement is drafted in broad terms, a court may interpret the force majeure clause narrowly. For example, if a service level agreement provides that the vendor’s failure to meet a service level “for any reason” entitles the customer to specified remedies, and the vendor fails to meet service levels, the court may take the position that the service level agreement controls the parties’ allocation of risk. The court might not consider the possibility that the vendor’s failure arguably falls within the scope of the force majeure clause and is, therefore, not something for which the vendor should be liable.
The force majeure clause and service level agreement also should be drafted in accordance with any termination clause in the contract. The parties can coordinate these clauses by specifically providing that the customer may terminate the contract if the force majeure continues for a certain minimum period of time. A customer also can reserve the right to terminate for the vendor’s unexcused failure to meet negotiated service levels for a specified period of time.
Although the force majeure clause often is glossed over in the drafting and negotiation of IT outsourcing and ASP agreements, customers and vendors alike should be aware of its significance and, in appropriate circumstances, tailor the force majeure clause to reflect the parties’ particular needs.
David M. Klein and Daniel C. Glazer are associates in the intellectual property group in the New York office of Shearman & Sterling. They regularly handle licensing and other intellectual property transactional matters.