How To Protect Your Business With Force Majeure Clause

Content

• What is Force Majeure Clause?
• Common Examples of Force Majeure Events
• What are the essential elements of a Force Majeure Clause?
• How to draft and enforce a strong Force Majeure Clause?
• Conclusion

As we lived through the COVID-19 pandemic, businesses across industries saw their plans go awry. Although contracts mainly specify the parameters of a business relationship, they can also assist parties in being ready for unforeseen circumstances. Companies can rely on precise contract language to shield themselves from the liabilities of uncontrollable events when dealing with suppliers, clients, or partners. 

One such contract clause is force majeure. They’re pretty standard in commercial contracts, from construction contracts to lease agreements. That is why most businesses end up using the same boilerplate content. However, given the pitfalls of the modern world, companies can do much more to improve the scope of force majeure clauses in their business deals.

What is Force Majeure Clause?

A force majeure clause in contracts protects parties in the event of unforeseen circumstances that prevent them from fulfilling their obligations. These "acts of God" can include natural disasters, wars, strikes, and pandemics. 

It can excuse a party from performing their contractual duties without facing penalties or legal consequences. In common law systems around the world, including the US, force majeure is acceptable. However, since the differing meaning of the term across nations, parties prefer to specifically define force majeure in their contracts, especially international ones.

Common Examples of Force Majeure Events

1. Natural Disasters: Earthquakes, hurricanes, floods, and wildfires are classic force majeure events. These events can cause widespread damage and disruption, making it impossible for parties to fulfill their contractual obligations.

2. Acts of God:  Also known as acts of nature, refer to events beyond human control, such as tornadoes, lightning strikes, or volcanic eruptions. These events can affect contracts and may trigger force majeure clauses.

3. War or Terrorism: War, acts of terrorism, or political unrest can also be considered force majeure events. These events can disrupt supply chains, transportation networks, and business operations, leading to the inability to fulfill contracts.

4. Government Actions: New regulations, trade embargoes, or expropriation of assets can also trigger force majeure clauses. These events are outside the parties’ control and can adversely impact contractual obligations.

5. Epidemics and Pandemics: Recent COVID-19 outbreaks, fall under unforeseeable events. Consequent restrictions and a lack of resources could make it impossible for parties to carry out their obligations. 

What are the essential elements of a force majeure clause?

When unforeseen events prevent a party from performing their obligations, the force majeure clause shields them from possible legal and financial consequences. It is especially helpful for long-term agreements. However, unavoidable events and associated risks can vary according to industry, governing law, and parties involved. Therefore, it is always best to tweak the force majeure clause to meet the unique needs of the contractual agreement.

1. Defined Events

The force majeure clause should clearly outline the specific events or circumstances that will trigger its application. It can include natural disasters, acts of terrorism, pandemics, and other unforeseeable events. Or businesses can incorporate events unique to the industry. For example, geological risk is a priority in coal supply agreements. 

2. Causation

The clause should specify that the triggering event must directly cause the inability of the affected party to perform their obligations under the contract. They must establish a direct link between the event and the party's failure to meet its responsibilities.

3. Notice Requirements

The clause should outline the procedures for invoking the force majeure clause, including any notice requirements the affected party must comply with. It ensures that both parties understand the situation and can take appropriate actions.

4. Mitigation Obligations

The clause may include provisions requiring the affected party to take reasonable steps to mitigate the impact of the force majeure event and minimize any delays or disruptions to the contract.

5. Duration of Relief

It's essential to specify the duration for which the affected party will be excused from performing their obligations under the contract due to the force majeure event. 

How to draft and enforce a strong Force Majeure Clause?

Contracts across industries utilize force majeure clauses to mitigate risks and uncertainties in commercial deals. Businesses must take steps to guarantee that these clauses are legally enforceable and cover all possible scenarios. They should pay close attention to contract language to avoid ambiguities and misinterpretations. 

1. Broadly Describe Force Majeure Events

The first step in drafting a robust force majeure clause is to clearly define the events that will trigger its activation. These events typically include natural disasters, acts of terrorism, war, government actions (such as regulatory changes or expropriation), and pandemics. It is essential to list these events explicitly to avoid any ambiguity or disputes later on.

When drafting the clause, consider including a catch-all provision that encompasses unforeseen events not specifically mentioned. This will provide additional protection in case a new, unforeseen event occurs that was not contemplated at the time of drafting.

2. Notification and Communication Procedures

Another critical aspect of a strong force majeure clause is the inclusion of clear notification and communication procedures. In the event of a force majeure event, both parties should be required to notify each other promptly. This notification should include details of the event, its expected impact on the contract, and any steps being taken to mitigate its effects.

It is essential to specify the mode of communication (such as email, registered mail, or phone call) and the timeframe within which the notification must be sent. It will ensure that both parties are informed and can take appropriate actions in response to the force majeure event.

3. Allocation of Risks and Liabilities

Another critical aspect of a force majeure clause is the sharing of risks and liabilities between the parties involved. The clause should specify how the parties will be affected during a force majeure event, including whether obligations will be suspended, terminated, or extended. It is also important to outline any financial implications, such as dividing costs incurred during the force majeure event. It includes determining how the parties will share the burden of the unforeseen circumstances and whether compensation or remedies will be available to the non-performing party.

4. Establish Relief

When drafting a force majeure clause, it's essential to outline the relief that will be provided in case of a force majeure event. It may include suspension of obligations, extension of deadlines, or even termination of the contract if the force majeure event persists for an extended period. Clearly defining the relief measures will help both parties understand their rights and obligations in times of crisis, preventing confusion and disputes.

5. Proving Force Majeure Event

The first step in drafting a robust force majeure clause is to clearly define what constitutes a force majeure event. Common examples include natural disasters, acts of war, government actions, and pandemics. It's essential to list specific events rather than using vague language like "acts of God" to avoid ambiguity.

When a force majeure event occurs, it's crucial to promptly notify the other party and provide evidence to support your claim. Keep detailed records of how the event has impacted your ability to perform under the contract, such as disrupted supply chains or government-mandated closures. This documentation will be invaluable if the enforceability of the clause is challenged.

6. Effects on Performance and Termination

A well-drafted force majeure clause should outline the consequences of a force majeure event on performance and the termination of the contract. Typically, the clause will excuse performance for the duration of the event and provide a mechanism for either party to terminate the contract if the force majeure event continues for an extended period.

Enforcing a force majeure clause requires strict adherence to the contractual terms. If either party fails to comply with notification requirements or provide sufficient evidence of the event's impact, it can result in the clause being deemed unenforceable. It's essential to act in good faith and communicate openly with the other party throughout the process to mitigate potential.

Conclusion

A Force Majeure clause allows parties to suspend or terminate their obligations in the event of unforeseeable circumstances beyond their control. These circumstances make it impossible or impracticable to fulfill the terms of the contract. Including a force majeure clause in a business contract is crucial for parties to mitigate risk and uncertainty. 

By clearly defining what constitutes a force majeure event and outlining the consequences of such an event, both parties can protect themselves from potential disputes and legal liabilities. It prevents them from being in breach of contract and incurring legal consequences. Thus, parties can establish fairness and equity in the contractual relationship.

However, what constitutes an unpredictable occurrence is often a point of contention among contractual parties. Therefore, there must be clear lines of communication during the drafting process to ensure everyone is on the same page. Dock 365, an all-inclusive contract management solution, allows businesses to draft, negotiate, and execute contracts on a single platform. Built on Microsoft 365, the system enables parties to collaborate on contracts in real-time, utilizing Teams, Outlook, and Word. Our digital redlining capabilities ensure everyone has access to accurate and current information.

Dock 365 offers much more to instill efficiency in the contract management process. Check out our competitive plans to choose the best solution for your business.