Are you entitled to relief under a contract if your bank cannot process payments?

It looks like the fallout from a failed software update at the RBS Group is set to continue for some time to come.

I’ve blogged before about the risks of IT upgrades and the importance of business continuity plans.

For a good summary over what appears to have happened in this case, the Guardian has a very informative article, which also explains why customers are continuing to experience problems despite the fact that the original problem has apparently been fixed (if Friday’s payment cycle ran before Tuesday’s aborted cycle then the problems would likely be even worse as payments may be out of sync, meaning that the backlog has to be cleared chronologically).

Force majeure
A number of press reports are focussing on the fallout for RBS’s customers (both corporate and individuals), and the impact on their dealings.

For businesses that are affected in their dealings under their contracts with third parties, they might wish to have a look at their contracts.

Most contracts will contain provisions to deal with force majeure (often referred to as “acts of God”), under which an affected party will be relieved from an obligation to do something under a contract, where it is prevented from doing so by something beyond its reasonable control. This will usually (but not always) be drafted to include the failures of third parties.

The last time I blogged about force majeure clauses was in relation to Icelandic Volcanoes. There I looked at the impact on an organisation’s supply chain.

In this case, organisations unable to make contractual payments may find that the force majeure clause gives them relief from the obligation to make that payment and, more importantly, prevents the counterpart from taking action for non-performance.

For example, if a contract contained an obligation to make a payment by a particular date, and the contract stated that time was of the essence in relation to that obligation, then a failure to make the payment may trigger a right for the other party to sue for damages (for example interest incurred) or to terminate the contract.

As payments continue to be delayed, a force majeure clause might give the customer valuable relief. Importantly, whilst the customer would be relieved from its obligation to perform, the supplier of a service should still be obliged to perform as normal.

Watch the drafting
On this point, I’ve noticed an increasing tendency for suppliers to seek to carve out the customer’s obligation to pay charges from the scope of relief granted for a force majeure event. The logic (from the supplier’s perspective) is that a force majeure event should not excuse a customer from making routine payments (which would in turn impact upon the supplier’s cashflow).

The RBS incident shows precisely why customers should seek to resist such wording.

Ultimately, this comes down to risk allocation. Who should bear the risk arising out of an event beyond the control of the parties to the contract? The customer or its supplier?

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June 2012
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