Force Majeure Clause: Everything You Need to Know
A “force majeure” clause in a contract has increasing relevance in a world that seems more unpredictable than ever. 4 min read
2. Key Elements of a Force Majeure Clause
3. Beware Broad Force Majeure Clauses
Force Majeure Clause
A “force majeure” clause in a contract has increasing relevance in a world that seems more unpredictable than ever. Whether disruption of services and goods occurs as a result of terrorist attacks, such as those on the World Trade Center on 9/11, or are the result of increasingly severe weather events, such as the hurricanes that wreaked havoc on Houston, New Orleans and Puerto Rico last year, companies must establish contingencies to deal with these issues when negotiating contracts. That is where a force majeure clause comes in.
Force majeure clauses are provisions in contracts that can provide protection from anything from flight and accommodation cancellation fees to the cost of lost goods and services. They release the obligations of parties, either temporarily or completely, due to circumstances beyond their control.
Without such a clause, a party to a contract may be subject to common law doctrines such as “impracticability” or “frustration of purpose,” and find themselves liable for potentially crippling costs.
Key Elements of a Force Majeure Clause
It is important for certain industries, such as meeting planners, hospitality providers, airlines and manufacturers, as well as business that conduct business internationally, to always include force majeure clauses in every agreement. They offer these industries the ability to adapt quickly to the impact of unexpected events without a loss of revenues. There are several important issues that every force majeure clause should address to some degree. These include:
- Stipulating which potential disruptions will be covered by the clause. These may include hurricanes, tornadoes, earthquakes of other events considered “Acts of God”. War, labor strikes and terrorist attacks are examples of events caused by humans that are often included. They can protect one or, in some circumstances, both parties in a contract.
- Clearly defining the extent of damage necessary to sanction the claims of loss. Courts have a history of narrowly viewing claims of force majeure, so a general claim that a disruption of travel caused by an event may need to specify what the definition of a disruption is. Is it a one day closing of airports due to bad weather or is a portion of a city in lock-down for days due to the search for terrorists after an attack? What percentage of non-attendance would qualify as a loss severe enough to invoke a force majeure clause?
- Identifying the location and potential disruptions. Are you hosting a convention in Florida during hurricane season or Chicago when winter storms are likely? Do you arrange cruise ships through the Suez Canal or in the Mediterranean Sea that might be disrupted by tensions in the Middle East? Are there airports or ports that you depend upon to ship or receive goods that have a history of being a terrorist target? Identify the threat as clearly as you can.
- Including catch-all phrases. It is almost impossible to predict the future and plan for every contingency that could possibly occur. It’s a good idea to include language such as “and any other events, including emergencies and non-emergencies,” into every force majeure clause that might hold up under judicial review.
- Avoiding restrictive language. One reason that it is advisable to use an attorney to draw up contracts that contain a force majeure clause is that experts in contract law can include language, such as “inadvisable, commercially impractical or illegal”, that does not limit a party’s liability in the event of a costly event occurring. While the Internet can be a great source to find samples of business contracts, when it comes to a force majeure clause, the boilerplate language found on the web may only excuse liability in the event of “impossibility” to meet obligations, which, again, can be narrowly interpreted by a court.
- Excusing underperformance. When many people think of the protections afforded through a force majeure clause, they think of a total loss of income due to the cancellation of an event or loss of inventory. There may only be partial damage to inventory or a reduced turnout for an event due to weather that still results in a loss. It’s a good idea to include language that provides protection for not only non-performance, but also underperformance.
Beware Broad Force Majeure Clauses
Sometimes a party to a contract may seek to include events for which they should be prepared to avoid or have prior knowledge to limit the extent of damages and shift responsibility for these events onto the other party. This is a good reason to carefully study all force majeure language in any agreement.
For instance, a company may seek to include a force majeure clause in the event of labor unrest. However, it might be determined that this risk should not be passed on to the other party if the company has had contentious relationships with its labor force in the past and their ability to fulfill contracts has been an historical occurrence.
It may only take one catastrophic event to destroy all the hard work you’ve put in to make your business a success. Taking the precaution of including a force majeure clause in every contract you negotiation is a great bit of insurance against unforeseen circumstances.
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