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What To Do When a Supplier Invokes the Act of God Clause in Your Contract



Act of God Clause

Act of God provisions, also called “Force Majeure” clauses, relate to events outside human control, like flash floods, earthquakes or other natural disasters. In contract law, an act of God may be interpreted as a defense against a breach for failing to perform based on the concepts of impossibility or impracticality.

It’s rare, but when a supplier triggers the “Act of God” clause in your contract, your response (versus reaction) can make or break how well your business performs in the next 90 days or so. It may be tempting to save money in the short term by removing a product from your menu or even raising prices when it’s harder or more expensive to get an important ingredient. However, taking care of your customers should be your first priority.

Be prepared

Every business should have a crisis management plan. A thorough crisis management plan facilitates rapid communication to ensure overall safety to both internal and external stakeholders. As well, it incorporates policies and procedures to perform an impact assessment and a plan to control media interaction during an event or crisis.

Part of that planning should be contingencies for your major products. If a product makes up a significant portion of your sales, you should have an idea of what you would do if the key ingredients became unavailable or increased drastically in price. If you do not have an alternative source already considered, then you’re reacting to the crisis. If you have an alternative supplier in the wing that you stay in regular or periodic contact with, you’re responding to the crisis.

Do your research and verify the claim

It should be easy to verify an Act of God’s claim. Make sure the complaint from your supplier is a universal issue and not a mistake they simply made. It’s easy to see if California has been under drought or not. Several years ago, a supplier of ours invoked an Act of God Clause simply because they felt many months after the contract was signed they had negotiated a bad deal.  While we would not take them to court over their insistence the issue was outside of their control, we did discontinue utilizing the supplier. It became an integrity issue.

Once you’ve verified the claim by your supplier, research to see if you can tell when the disaster will stop. Check to see if crops are growing again or if they can bring them in from other areas. That information will help you evaluate the length of the crisis. Anything under three months is considered short term. The length of your crisis may depend on the product as well. While chickens take eight to nine weeks to go from egg to plate, steak is more like 18 to 24 months. Evaluating the time period based on the ingredient is crucial.

Most importantly, put the customer first

There is a difference between losing money by selling a product and making less money on a product over the short-term. Evaluate that first, and if you can continue to sell your product without losing money, strongly consider doing so without raising prices. It’s better to make a little less for a few months when the margins will eventually recover than to disappoint customers by taking the product off the menu or raising prices on it. This creates goodwill with your customers because they know you have their best interests at heart.

For example, Penn Station’s lemon supplier faced high winds that damaged crops, so we’re facing a huge lemon shortage. Instead of removing fresh-squeezed lemonade, one of our signature products, from the menu or raising the price, we made the conscious decision to operate business as usual. We are encouraging franchisees to find lemons from alternative sources if they must to keep the lemonade on the menu. Are lemons harder to find and more expensive? Yes, but our customers trust us, and we want to maintain that trust with them.

Customers that trust and respect you will be rightfully disappointed if you remove a product from the menu or significantly raise its prices for a short-term crisis. It’s much better to take care of guests and put in the extra time and money to find alternative sources for the product until your regular supplier is operating normally again.

Craig Dunaway has been president of Penn Station since 1999. Before joining Penn Station Inc., Dunaway was a partner at the regional accounting firm of McCauley, Nicolas & Company, LLC in Jeffersonville, Indiana, where he had worked since 1982 in various staff and managerial positions. Dunaway has a bachelor’s degree in accounting from Indiana University and is still a licensed CPA. Dunaway formerly had ownership interests in a Papa John’s® franchisee that owned 11 stores, and he served as the secretary/treasurer for that Papa John’s® franchisee. In addition, he had ownership interests in Coastal Cheesesteaks, LLC (headquartered in Raleigh, North Carolina) until June 2011 and in Louisville Cheesesteaks, LLC (headquartered in Louisville, Kentucky) until January 2014, both of which are Penn Station franchisees. While a shareholder in those Penn Station franchisees, Dunaway served as secretary/treasurer. Penn Station was named one of the Best Franchises to Buy by Forbes in 2016 and 2018 and one of the Best Franchise Deals by QSR Magazine in 2016 and 2017.