Force Majuere

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:

"It shall not constitute a material breach, and neither party shall lose any rights hereunder or be liable to the other party for damages or losses, on account of failure of performance by the defaulting party, if the failure is the result of a natural disaster, national emergency, the act or omission of a third party, or similar event outside of a party's control."

A prudent force majeure clause specifically enumerates the events that will prevent performance and entitle a party to suspend or excuse an obligation. For example, a specific and contemporary force majeure clause may consists of the following language:

"Neither party shall lose any rights hereunder or be liable to the other party for damages or losses, except for payment obligations, on account of failure of performance by the defaulting party if the failure is the result of an Act of God (e.g., fire, flood, inclement weather, epidemic, or earthquake) war or act of terrorism, including chemical or biological warfare; labor dispute, lockout, strike, embargo; governmental acts, orders, or restrictions; failure of suppliers or third persons; or any other reason where failure to perform is beyond the reasonable control, and is not caused by the negligence, intentional conduct or misconduct of the defaulting party, and the defaulting party has exercised all reasonable efforts to avoid or remedy such force majeure. The defaulting party must provide written notice of the force majeure event to the remaining parties within two (2) business days of such event."

Moreover, force majeure clauses may include language that is industry specific. The construction industry, for example, may incorporate a clause to suspend or excuse performance obligations if its failure to perform is caused by subcontractors, materialmen, or carriers. Likewise, if the contract concerns internet and online services, a force majeure clause may include events such as server failures, software glitches, and copyright or labor disputes. The upside of drafting a force majeure clause is the ability to apply it to the unique circumstances of the parties.

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 by permission
from Trade Vendor Quarterly Summer 02