Understanding force majeure: protecting your business from surprises
When unexpected events like natural disasters or sudden strikes disrupt your business, how do you protect your contracts and avoid legal trouble? Force majeure clauses offer a critical safety net, shielding businesses from the consequences of events beyond their control. Understanding how to effectively use these clauses ensures your company is prepared for whatever comes its way.
What is force majeure?
The term “force majeure” has its origins in French law, literally translating to “superior force.” Initially, it was used to describe events beyond human control—natural disasters, acts of God, if you will.
Over the years, this term has evolved into a significant legal concept that is now a staple in contract law worldwide. The underlying idea is straightforward: when an extraordinary event occurs—something unanticipated and unavoidable—the party affected should not be held accountable for failing to fulfill their contractual obligations.
Force majeure in legal terms
In legal contexts, force majeure acts as a protective measure, ensuring that parties aren’t unfairly penalized for circumstances outside their control. It offers a framework that acknowledges the impact of unexpected events and provides a legal cushion for businesses navigating these challenges.
How force majeure works in contracts
Force majeure clauses are a common feature in many contracts, particularly in industries vulnerable to disruptions, such as construction, shipping, and manufacturing. These clauses serve to specify which events qualify as force majeure and lay out the steps the affected party must take if such events occur.
For example, a contract might list natural disasters, wars, or government actions as force majeure events and require the affected party to notify the other party within a specified timeframe.
The primary purpose of a force majeure clause is to protect both parties in a contract by establishing clear expectations in the event of an unforeseeable incident. It ensures that neither party is unfairly burdened when something outside their control disrupts their ability to meet contractual obligations.
Without such a clause, businesses could find themselves entangled in prolonged legal disputes, trying to prove that an event was genuinely beyond their control.
The different types of force majeure events
Natural disasters: When nature strikes unexpectedly
Natural disasters are among the most common types of force majeure events. These include:
Earthquakes
Sudden and often catastrophic earthquakes can severely damage infrastructure, halt operations, and make it impossible for businesses to fulfill contracts. For example, an earthquake might destroy a factory, making it impossible to meet production deadlines.
Floods
Flooding can disrupt transportation networks, damage goods in transit, and cause significant delays in delivery schedules. In a worst-case scenario, a flood could render entire regions inaccessible, preventing businesses from operating altogether.
Hurricanes
Hurricanes can cause widespread damage to buildings, infrastructure, and supply chains. The high winds and heavy rains associated with hurricanes often lead to extended power outages, flooding, and even complete destruction of facilities.
Wildfires
In regions prone to wildfires, these events can cause evacuation orders, destroy property, and create hazardous conditions that make it impossible to continue operations. Wildfires can also disrupt air quality and transportation, further complicating business activities.
Why natural disasters are included in force majeure clauses:
Unpredictability
Natural disasters often strike without warning and can be devastating, leaving little to no time for businesses to prepare or respond adequately. The sheer unpredictability of these events is why they are commonly included in force majeure clauses.
Operational impact
Natural disasters can cause significant delays, damage property, disrupt supply chains, and even force businesses to temporarily or permanently cease operations. Without the protection of a force majeure clause, companies could be held liable for failing to meet contractual obligations due to these uncontrollable circumstances.
Human-related events: Unpredictable actions and their impact
Human actions can also trigger force majeure clauses, especially when these actions are unexpected and disruptive. Examples include:
Wars
Armed conflicts can make it unsafe or impossible to conduct business in affected areas. War can disrupt supply chains, damage infrastructure, and create an environment where fulfilling contractual obligations is not feasible.
Strikes
Labor strikes, particularly those involving key industries or services, can bring operations to a standstill. For instance, a strike in the transportation sector might prevent goods from being delivered, leading to delays that a company cannot control.
Riots
Civil unrest or riots can lead to widespread disruption, including damage to property, disruption of public services, and unsafe working conditions. Businesses affected by such events might find it impossible to continue operations until the situation stabilizes.
Civil unrest
This broader category includes any form of public disturbance or protest that disrupts normal business operations. Civil unrest can lead to road blockages, safety concerns for employees, and other disruptions that prevent a company from fulfilling its contractual obligations.
Impact of human-related events:
Disruption of operations
These events can halt production, delay deliveries, create unsafe working conditions, or even make it impossible to operate in certain areas. The impact on a business can be just as severe as a natural disaster, affecting the ability to meet deadlines and fulfill contracts.
Unpredictability
Human-related events are often sudden and can escalate quickly leaving businesses with little time to react. Unlike planned disruptions, these events are beyond the control of the company and can have widespread effects that are difficult to mitigate.
Other unexpected events: Beyond nature and human control
In addition to natural disasters and human-related events, other unforeseen occurrences can also be classified as force majeure. These include:
Pandemics (e.g., COVID-19)
The COVID-19 pandemic caused unprecedented global disruptions, leading many businesses to invoke force majeure clauses. Pandemics can result in government-imposed lockdowns, supply chain interruptions, and workforce shortages, making it difficult or impossible to fulfill contractual obligations.
Government-imposed lockdowns
Governments might impose lockdowns or other restrictive measures in response to crises such as pandemics, civil unrest, or environmental disasters. These lockdowns can force businesses to close temporarily, disrupt operations, and prevent them from meeting their contractual duties.
Significant regulatory changes
Sudden changes in laws or regulations can have a major impact on a business’s ability to operate. For example, a new law might ban a certain product or practice, making it impossible for a company to fulfill a contract based on the old regulations.
Why include these events in force majeure clauses:
COVID-19 showed us how unexpected and widespread the impact of such events can be. It was a wake-up call that these things do happen, and they can be devastating.
The world is full of surprises, and it’s smart to include a wide range of events in your force majeure clause. This way, you’re covered no matter what life throws at you.
Including a broad range of events in your force majeure clause makes sure you’re ready for anything. It’s about being smart and thinking ahead so that you’re not caught off guard when the unexpected happens.
What to include in a force majeure clause for your business
To make sure your force majeure clause really works for you, there are a few must-have elements:
Specific events covered:
Clearly list out what kinds of events are covered—like natural disasters, strikes, pandemics, or government actions. The more specific you are, the better, because it leaves less room for confusion later on.
Avoid vague language. Don’t just say “any unforeseen event”; give concrete examples so everyone knows what you mean.
Notification process:
The clause should say how quickly the affected party needs to inform the other side about the force majeure event. Usually, you’ll have a set number of days to provide notice.
It’s often required to provide proof of the event and explain how it’s impacting your ability to fulfill the contract.
Impact on obligations:
Specify whether the contract is paused during the force majeure event or if certain obligations are excused altogether. Make sure it’s clear what happens to the contract once the event is over.
Exclusions:
It’s just as important to list what’s not considered force majeure. For instance, economic downturns or events that could have been avoided with reasonable care might be excluded.
How to write a force majeure clause that works
When drafting a force majeure clause, here are some tips to make sure it’s clear and effective:
Be specific
Clearly define what counts as a force majeure event, avoiding any vague terms that could lead to disputes. For example, instead of saying “unforeseen circumstances,” list out specific events like “earthquakes” or “government-imposed lockdowns.”
Set clear procedures
Outline what steps need to be taken if a force majeure event occurs, like how soon the other party should be notified and what kind of evidence is needed.
Use simple language
The clause should be easy to understand. Avoid legal jargon that might confuse the parties involved.
Think ahead
Consider your industry and the specific risks you face, and make sure the clause covers those possibilities.
How courts interpret force majeure clauses
When a force majeure clause is brought before a court, judges typically take a close look at the specific language used in the contract. They’ll ask questions like:
Is the event covered?
The court will first determine whether the event in question is actually listed as a force majeure event in the contract. If the event isn’t specifically mentioned or isn’t covered by the clause, the court might not enforce it.
Was it truly unforeseen?
Courts also consider whether the event was truly unforeseen and outside the control of the parties. If the event could have been anticipated or avoided, the clause might not apply.
Did the parties follow procedures?
Courts will check whether the affected party followed the procedures outlined in the clause, such as notifying the other party within the required timeframe.
Challenges you might face with force majeure
Even with a well-drafted force majeure clause, there can be legal challenges:
Proving the event
One of the biggest challenges is proving that the event was truly a force majeure event. This can involve providing evidence that the event was unforeseen and had a direct impact on your ability to perform under the contract.
Disputes over interpretation
Sometimes, there’s disagreement over what the clause actually covers. If the language is vague, it might lead to disputes about whether the event qualifies as force majeure.
Following procedures
If you don’t follow the notification and documentation procedures exactly as outlined, you might lose the protection of the clause.
Understanding the limits of force majeure: What force majeure doesn’t cover
Force majeure clauses are powerful, but they don’t cover everything. Here are some common exclusions:
Economic issues
General economic downturns or financial troubles usually aren’t considered force majeure events. If your business is struggling because of a market slump, you likely won’t be able to invoke this clause.
Foreseeable risks
Events that could have been predicted or avoided with reasonable care often aren’t covered. For example, if a flood was forecasted and you didn’t take any precautions, the court might not see it as a valid force majeure event.
Internal problems
Issues like poor management or lack of resources aren’t covered either. The clause is meant for external events, not problems within your own control.
Tips for negotiating a force majeure clause
Negotiating a force majeure clause can be tricky, but here are some practical tips:
Consider all scenarios
Think about the worst-case scenarios that could impact your business and make sure they’re included in the clause. Don’t just focus on the obvious risks—think broadly.
Agree on procedures
Discuss and agree on the notification process and what kind of documentation will be required if a force majeure event occurs. Both parties should be on the same page.
Customize force majeure clauses for your business
It’s also important to tailor the force majeure clause to your specific business needs. Different industries face different risks, so customize the clause to reflect the unique challenges your business might face. For example, a tech company might want to include cyber-attacks as a force majeure event.
Termination rights
If the event goes on for too long, you might want the option to terminate the contract. This can help protect your business from being stuck in an impossible situation.
Key takeaways
Understanding force majeure is crucial for any business because it provides a safety net when things go wrong. By having a well-drafted force majeure clause in your contracts, you can protect yourself from the unexpected and ensure that you’re prepared to handle disruptions without facing unnecessary penalties or disputes.
FAQs
What is the legal definition of force majeure?
Force majeure refers to an unexpected event, like a natural disaster or strike, that’s beyond anyone’s control and prevents people from fulfilling their contract obligations.
Is fire considered force majeure?
Yes, a fire can be considered force majeure if it’s sudden and beyond control, such as a wildfire that damages property and disrupts business operations.
What are the criteria for force majeure?
For something to be force majeure, it must be unexpected, completely out of the parties’ control, and make it impossible to carry out the contract.
How do you read a force majeure clause?
To understand a force majeure clause, check which events are covered, what you need to do if they happen, and what situations aren’t included.
What is the duration of force majeure?
The duration of force majeure depends on how long the unforeseen event lasts, as specified in the contract, and can lead to paused obligations or contract termination if it continues too long.
