|Business Credit Law and Regulations|
A Method to Allocate Risk of Nonperformance
A variety of recent events have renewed the interest of force majeure clauses in contracts. The catastrophic events of September 11 and the continued threat of terrorism, domestic and abroad, are a grim reminder that tragedy does not discriminate. These events only compound common risks associated with conducting business in a cycling domestic economy and unpredictable international markets. The effect of these events requires parties to closely assess their contractual relationships and predict future events to allocate the risk of nonperformance. Today's contracts must contemplate common risks while preparing for events that were once unimaginable.
Defining Force Majeure
Force majeure is a term used to describe a "superior force" event. The purpose of a force majeure clause is two-fold: it allocates risk and puts the parties on notice of events that may suspend or excuse service. The essential requirement of force majeure is that the invoking party's performance of a contractual obligation must be prevented by a supervening event that is unforeseen and not within the control of either party. Typical force majeure events include Acts of God, superceding governmental authority, civil strife, and labor disputes. However, there is no uniform set of events that constitute force majeure. Instead, force majeure remains a flexible concept that permits the parties to formulate an agreement that corresponds to their unique course of dealings and industry idiosyncrasies. Moreover, recent events have increased the necessity to include additional, unthinkable events, such as terrorism and the threat of biological and chemical warfare.
Negotiating a Force Majeure Clause
A party in the negotiation stage of a force majeure clause must scrutinize the events and allocation of risk to assure that the clause is not one-sided or unenforceable. If an event occurs that is not covered or specifically enumerated in a force majeure clause, courts are reluctant to conclude that a contract is unconscionable, and therefore, hold the parties to the benefit of their bargain. Additionally, parties should review the legal effect of enumerating an event in a force majeure clause. For example, a commonly invoked force majeure event is market fluctuation that renders a contract economically unfeasible. A majority of courts refuse to excuse performance on the theory that a contract is no longer profitable.
Drafting a Force Majeure Clause
In drafting a force majeure clause, parties may rely on general
clauses or specifically enumerate which events will constitute force
majeure. For example, a general force majeure clause may consists
of the following language:
Invoking a Force Majeure Clause
Generally, a party may invoke a force majeure clause if an enumerated event occurs that is out of the party's control and prevents performance of a contractual obligation. The burden of proof is on the party seeking to invoke the force majeure clause. The force majeure event may either suspend or excuse a party's performance. It is imperative that the party invoking a force majeure clause provide written notice to the other party. This permits the party that is not in default to mitigate against the effects of a force majeure event.
Protecting Against a Force Majeure Event
As the definition implies, it is impossible for the party invoking a force majeure clause to avoid an event from interfering with its performance on a contractual obligation. Accordingly, it is imperative that the parties negotiate a clear and concise force majeure clause that allocates risk and provides predictability to permit a party to expeditiously respond to a force majeure event. Additionally, the affected party may mitigate against the effect of a force majeure event at the onset of the contract. For example, a party should consult an insurance broker to determine whether insurance is available to cover financial losses stemming from a force majeure event. If the stakes are high, then insuring performance may limit or prevent adverse consequences associated with nonperformance. Moreover, develop a "B" plan to soften the landing of a party's nonperformance. If the contract involves services or supplies, find an alternative source in advance. The bottom line is to limit losses.
Blakeley & Blakeley LLP Reprinted