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How Suppliers Let Themselves Off the Hook for Poor Performance

Supply Chain Management Contract Training
Beware of Force Majeure

Suppliers perform poorly everywhere. Sometimes it’s their fault, sometimes it’s not.

Ever see a sports star go to another team and then suddenly lose their magic? You have to wonder if it’s a coaching problem. In our case, a poorly performing supplier may be a purchasing problem!

In any event, the one thing you have to remember is suppliers are in the business of making money. Period, end. The more you write your contracts to allow them to be guaranteed the money without contractually having to deliver performance, the worse off you are.

Just one of the clauses you really need to pay attention to, and what will be the focus for this week’s blog, is the Force Majeure or Contingencies clause in your contract. Force Majeure means “major force” in French. That’s the only French I know, don’t get excited!

What does this clause do? Well, it gives one or both parties a “get out of jail free pass” when they fail to perform due to certain circumstances that are undeniably outside of their control. These are called “Acts of God” in the legal community.

Put your religious beliefs outside and just keep your focus on the intent here. What this means is if it’s an “Act of God”, then it is not an act brought about by you or the supplier.

What kind of things qualify? Tornado, hurricane, natural flood, tsunami, earthquake, war, attacks by foreign enemies, mass civil riot and unrest, things like that.

Now this clause can be unilateral (applying to the supplier only in our case) or bilateral (applying to both parties). It’s better to have it bilateral, because your company may be hit by one of these things and then be unable to pay the supplier on time. Instead of being a breach of contract, you’d be able to claim temporary exemption due to Force Majeure, without damages being invoked.

Here’s a typical Force Majeure clause that a supplier would like to see inserted in your contract, and they will very frequently try to slip some tricky things in, just to see if you are paying attention. See if you can catch it:

If either party hereto is prevented in the performance of any act required hereunder by reason of act of God, fire, flood, or other disaster, malicious injury, strikes, lock-outs, or other labor troubles, supplier late deliveries, supply line interruptions, riots, insurrection, or war, then performance of such act shall be excused for the period of the delay and the period of the performance of any such act shall be extended for a period equivalent to the period of such delay except that if any delay exceeds six months, then the party entitled to such performance shall have the option to terminate this Agreement.

Did you catch it? Read it again if you didn’t.

The supplier wants YOU to be responsible if THEIR labor goes on strike, or if THEY choose to lock the building and keep employees out or if THEIR suppliers deliver late to them or if THEY experience a materials supply line interruption.

They also included things like fire or flood. Now, if an entire city was flooded or on fire, then that would be acceptable. However, if their building was not to code and they flooded their own building or the building caught on fire as a result, the supplier would once again want to chalk this up as an “Act of God” and be off the hook for performance. Not a bad deal for them, huh?

In other words, suppliers want their own mismanagement of their labor force and their supply line and their building to be considered an “Act of God” and for YOU to pay the consequences without right or recourse. Not going to happen!

But the sad reality is that purchasing professionals sign up to this all the time, and suppliers laugh all the way back to their office afterwards. My purchasing friends and followers,we are better than this.

Now, let me make this a little more dismal. This is just ONE clause that makes us vulnerable in the contract when we don’t have proper knowledge. There’s probably 100 such clauses and potential “gotchas” in every contract you sign.

And you never realize you got duped until way after you signed the contract…. when something goes wrong. And if you get duped bad enough, you tarnish your results and your perception inside your company. You may even have to brush off your resume and look for a fresh start elsewhere.

Does it really have to get to that point though?

The ground shaking announcement coming from me personally on January 1st, 2014 is going to solve this and all your other purchasing and supply chain management nightmares. It is going to give you the tools to catapult your career, your income, and your results forever.

I can’t wait. Don’t you dare miss it.

See you next week!