What is - Force Majeure?

In the next of our series of explanatory articles on commercial legal issues, we asked one of the freelancers who works with us to put some thought into explaining Force Majeure.

As always, it is worth restating that HPLpro is not a legal firm, and this article should not be taken as legal advice. It is important for you and your business to have experienced legal practitioners review any legal issues or documents to ensure that they adequately meet your needs. Please feel free to request a freelance in-house lawyer from us if required.

What could possibly go wrong?

Force Majeure is a term that is related to contracts, so if you have no interest in contracts it is probably best that you look away now. For the rest of you who are keen to understand this peculiar term, read on!

Putting it simply – and this will be a very simplified explanation given the space – force majeure is a list of disasters. Specifically, it is a list of disasters which, if they arise, mean that a party to the contract may be allowed to be in breach of that contract. The point of force majeure clauses is to attempt take a reasonable approach to apportioning risk in a contract for certain events: which party should bear the risk of a certain disaster happening. Common events are: fire, flood, strike, armed insurrection, war, and so on. You may have also seen 'act of god,' listed in a force majeure clause and in modern parlance it is best thinking of this phrase as meaning a natural disaster such as a flood or lightning strike.

Consider this: if an earthquake delays a supplier of chemicals making a delivery to their customer, that delay will likely have a real cost to the customer (it may even put them in breach of other contracts). Without a force majeure clause in a contract, the supplier is likely to be responsible for the costs of delay; with a force majeure clause inserted the supplier is likely to be able to use that clause to excuse their breach meaning that the customer will pay the costs of the delay. Which position is fairer? Should the customer or the supplier feel the pain of an earthquake that was the fault or neither party? It is hard to say really as neither party caused the earthquake and neither party could control the effects of the earthquake.

Out of Control

Which brings us neatly on to the next element of force majeure clauses: the concept of reasonable control. In most force majeure clauses, you are likely to see the phrase, "Beyond that party's reasonable control".  This is a reference to the outside influence of a disaster - neither party could control that disaster. The use of the word 'reasonable' in this phrase is an attempt to limit the extent of what is considered control.

For example, flooding is a common disaster that you may see listed in a force majeure clause; the week after the above earthquake, the unlucky supplier's factory got flooded meaning more delays for their customers and more cost. Oh dear. Classic force majeure. Nothing could have been done about a flood, right? Wrong; it just so happens that the supplier has a flood control system at the factory that was not activated at the time of the flood because it made a whirring noise that irritated the plant manager. Had it been activated, the flood would not have happened. The means of averting the disaster was in the supplier's control, meaning that it is only fair that the supplier bears the cost of the delay.

May the Force - Majeure - be with you

So, force majeure clauses are an attempt to apportion risk for external events in a contract. Whilst, on the face of it, the force majeure clause is fairly bland, standard and uninspiring, it can often be a secret battle ground between supplier and procurer who tend to want to move the risk dial toward the other party. If you are a vendor you may want that disaster list to be as comprehensive as possible. On the other hand, if you are buying a product or a service, it is highly likely that the party that you are buying from will have included a long and wide ranging list of disasters in the force majeure clause. In fact, some elements may not be a disaster at all, so it is vitally important to have a legally trained person consider the details of the language of your contracts as small changes can have a major impact. For example, a clause may list 'illness' as an event under the force majeure clause. What would the impact of that be?  The author of this piece has seen: 'objects falling out of planes' listed in a force majeure clause as well as 'inclement weather'.

What happens next?

The actual effect of the clause will differ depending upon the wording of the clause itself. Normally, the party relying on the force majeure clause will be excused from their breach of contract for as long as the force majeure event interrupts their performance of the contract, but that is not necessarily always going to be the case and again, having a legally trained person review those clauses is vital. For example, a clause may require the party relying on the clause to notify the other party of the event within a particular timeframe and, if they don't, they may lose the right to rely on the clause.

Additionally, a clause may contain a right for the party not affected by the force majeure event to terminate the contract if the event lasts for more than, say, a month. In the absence of such a clause, the parties may become stuck in a contract that cannot be performed due to a disaster, the risk for which rests solely on the shoulders of one party.

Of course, the presence of a force majeure clause doesn’t always mean that the party relying on it can get off scot free – that will depend upon the details of the clause itself and the law of the jurisdiction that governs the contract. Force majeure clauses can be highly controversial and may not always be upheld by a court as being enforceable. For example, courts in England and Wales are not likely to agree that economic hardship is a valid force majeure event, even if a contract says that it is. What will or will not be acceptable as a force majeure event will be different from country to country.

Check the Small Print

On the other hand, what is enforceable and what is written into a contract are not always the same thing. After all, you can persuade a party to a contract that you are right without having to go to court. This means that the details of the clause are important and can have a significant impact. For example, if a clause simply references 'beyond that party's control,' instead of 'beyond that party's reasonable control,' that could have a significant influence on the outcome of the clause.

Further, some clauses require the force majeure event to be unforeseen which adds a whole extra layer of complication; what does foreseen mean in the context of a flood, strike or terrorist attack? The answer will depend upon the specific circumstances of the contract and the event itself.

Even taking the above into account, force majeure clauses are often overlooked by businesses and lawyers because in many instances they will be bland and uninteresting. Every now and then, however, something more interesting pops up so it always pays to be vigilant particularly as some force majeure events may be uninsurable.

Finally, and this is something that we will revisit in a later article on contract management, it is worthwhile making sure that the force majeure clauses that your business agrees to in its procurement contracts are matched in your sales contracts. Otherwise your business could be left holding the force majeure disaster baby.

Let us know if you have any comments on the above or any exciting and interesting tales of Force Majeure!

Cheers
 
The HPLpro Team