Project Managers Vs. Force Majeure

Do project managers stand a chance under such contractual clauses?

"Force majeure" is a standard contractual clause that frees parties, bound by a contract, from liability or obligation if an "act of god" happens. Unless these acts are clearly defined, they are assumed to be extraordinary events with an extremely low likelihood of occurring. Under these circumstances, no loss will be borne by the suppliers.

Ring a bell!

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COVID- 19!!!!

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Yes.

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So, I just had a webinar on emerging technologies, and a good discussion took place on the semiconductor industry. I think it is fair to say that semiconductors are everywhere: in our hands SMARTPHONES, homes, and offices. EVERYWHERE.

During this brief discussion, I remembered my last few months in HCIL (Honda Cars India Ltd.)? when the pandemic had just begun its spread. The discussion took me to DECEMBER 2019.

Now this was the time when I first heard it from one of my suppliers as I was handling eight suppliers at the time for Honda projects, passenger vehicles. One of my top suppliers was a German-based company, and it provided its product to almost all the global automakers, not just four-wheelers but also the leading two-wheeler brands.

So this famously known supplier that I cannot name because of some top secrecy oaths that I had taken with my company during my onboarding, and as my job was based on new product development, I definitely cannot talk about a lot of things openly and exactly, but overall I am going with this simple sentence that a part of the job was overlooking delivery and quality assurance of electrical products for the new model planned to be launched in say three years or two years or maybe less than that. It was December when the project manager of this highly efficient and one of the top-ranked suppliers of mine called me before mailing it officially to inform me that they had declared Force Majeure and could not supply the desired parts on the required date. This was applicable to all the then-upcoming projects, including mass production parts, as this was among the first mails also that we had received in our department (a team of around 40 people), all very well aware of the Japanese way of working following standard operating procedures with minute plannings and resources in place. With carefully crafted contracts and documentation, might I add? These procedures are being followed in all Honda plants. For such training, this was a surprise to me as when we make a car, a missing part means an unfinished car. That means not meeting customer demand.

A FAILURE.

I was comparatively new at the time in the auto-biz, and the supplier was new but not new to me. What counts is that the part was of the highest priority, and it bothered me a lot, so when the mail came beforehand, I was informed by the project manager (Thank you, Mr. B.A., for the lesson). I had a conversation directly with him about what he meant about this, and then I got to know about the contract clause and exactly what the purchasing team had agreed to or not; I then talked to my purchase team member, handling the same supplier and they also mentioned the same so after cross verifying I escalated it to my manager and honestly, my manager being a good leader made me understand what Force Majeure implied for the business.

Additionally, our suppliers’ team, a team of highly competent and experienced leaders in quality delivery, had a meeting with our team, and then they made us clear how out of hand the situation was in regards to supply chain breakdown and at the time we all knew, and definitely all the automakers knew even I am pretty sure that along with automakers, the smartphone industry also knew what was about to come so we declared for ourselves, and we realized it there is nothing that we can do, and so even if our parts are being made no one is liable for it and everyone is left to face the inevitable, LOSS and of course whatever happened later is non-disclosable and a history.

After January, it was not feasible for a lot of semiconductor suppliers to supply it to India and not just India; the supply chain breakdown was taking place all over the world. I would also like to mention here that we all were already under a lot of pressure to adjust to the new BS 6 norms and have profitability out of it. Then there was also the pressure of getting our newly designed parts ready or smoothly developed before the launch of the first Honda plugging hybrid electric vehicle (PHEV), the beloved Honda City HEV.

Now, here I am also a project manager, along with a part of supplier development. I am the one who has seen the part development for all the models that are being supplied by the supplier. In my case, I had a way of approaching the solution by having a helpful coordinating team and an established HONDA system.

Section Two

Hence, I am adding here what the project management team, or the manager can do under such circumstances. There are more doubts now about what we can do about such conditions to understand the contracts and what we can do about it. Hence, it is not only essential for us, the project managers, but it is also essential for anybody from the whole view of having a good product and meeting customers' demands at the right time.

So, let's see what the project manager can do under such conditions. Because of force majeure. Some projects have been derailed, failed to meet their objectives, or are late. Customers have faced contractors, suppliers, and developers absolving themselves of their contractual responsibilities by pleading "force majeure."

Force majeure clauses shift risk allocation from project contractors to their customers or other contractual stakeholders if used.

Organizations with projects in regions where force majeure events occur should prepare for ongoing conditions. Organizations should add more contractual details and definitions to force majeure provisions in existing and new contracts and reduce the potential for conflict and ambiguity. It eases tension and increases the prospect of sharing the responsibilities of cost and impact of these events. Project managers can follow these good practices to add detail and definition to force majeure clauses in the following way:

1. Define what circumstances and events constitute a force majeure. In my area, the definition of force majeure seems to be subjective. Experts working on the project should clarify this section as much as they can by providing examples and inclusions. The list may emphasize political turmoil, riots, civil war, invasion, terrorism, revolution, insurrection, or revolution depending on the project's character and location. Radiation spills, nuclear mishaps, toxic explosions, and catastrophic weather events are some potential outcomes.

2. Define what constitutes the end of a force majeure. A strike or demonstration, for instance, would have a beginning and a finish. On the other hand, this incident might have lasting effects that cause delays in the project. Workplace changes, decreased productivity and resources, or utility, material, and equipment losses are all examples of what may be considered a change in circumstances.

If these effects are the basis for non-performance and non-liability for damages, then the force majeure clause needs to specify that.

3. Agree on a formal process in the event of a force majeure. There should be additions to the clause on the following: Formal notice time, Method of notification of a force majeure event, Process for executing mitigation responses and Agreement on a neutral country where arbitration can be held

4. Identify risk planning and mitigation responsibilities. Project managers should identify risks and responses associated with continuing the project work, such as:

• Renegotiation of contracts reflecting any changes or cost increases in the market
• Force majeure insurance, associated guarantees, and contingency funds
• Clarity on when to reasonably employ mitigation responsibilities, the costs and period of mitigation efforts, whether these efforts should be shared or incurred, and for how long
• Revision of schedules or extensions for projects with fixed completion dates
• Recovery of agreed costs ?
• Eventual termination of the contract

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Prevention is better than cure.

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Hope you guys enjoy reading the article. It is coming from a personal learning/experience.

And this particular incident is very close to me. I feel happy to share.