For years, this wordy gem has sat unread and mostly ignored at the end of commercial contracts. Saddled with the nick-name ‘boilerplate’ and a bit too stout, most people skim over her intelligent insights and ignore the steely grit of her precise wording. But, she is the geek of the contract world; keeping the lights on and fixing things when other clauses have given up in a simpering mess of self-righteous indignation, there she is, working late and still holding out to get the job done.
So what does Force Majeure mean in a contract and why is it so important right now? Let’s look at a typical force majeure clause (I’ll paraphrase rather than giving you the standard “boilerplate” but show common words used in italics) which will say:
– “Neither party shall be liable”
– “For failure or delay” in performing the contract
– Or for avoiding (the word most used is “default”) their contractual obligations
– In the event of …. and then the clause goes on to list numerous cheery circumstances that would derail even the most fervent of deals.
In a nutshell, what this means is that it’s no-one’s fault if one side or the other can’t go ahead with the contract as planned. So why not just say that?! It’s a little more complicated than that because the clause also operates to remove the opportunity for one party to claim the other has breached the contract and, if there is no fault attributed, it withdraws the ability for the party who could still perform the contract to claim damages.
Let’s look at the type of event that is often listed. Just as an aside I’ll say that I saw the inclusion of the term “viral pandemic” for the first time ever in 24 years of practice about two months ago (incidentally, I deleted the word ‘viral’, after all if you are including pandemic, why limit it to viruses?) Usually a force majeure clause will list the type of event that it is intended to cover like this:
– Events caused by the elements, fire, flood, earthquake, power outages (“sometimes also called “Acts of God”)
– Events caused by humans such as riots, civil disorder, acts of Government, war, terrorism; and
– “Anything similar” which is “beyond the reasonable control of the party”, which means that if it is not something they could realistically have prevented (like ensuring no access by a hacker) or could have stopped from a practical perspective (like including a warning about allergens on packaging), it is included.
Usually this “anything similar” clause will have some proviso attached to it, such as that the party claiming it was beyond their control has acted promptly, notified the other side quickly and wasn’t at fault in letting this happen.
So now we have a clause which provides in essence that it’s no-one’s fault if this type of event occurs.
The real genius of the force majeure clause is that if the above applies – or even if one party thinks it applies – the contract can effectively be put on hold. What happens after that is where the devil is in the detail because most force majeure clauses only ‘pause the contract’ for a specific number of days, after which time the party who hasn’t experienced the event will have the option to either re-negotiate the terms or to cancel the contract – on a no fault basis. Again what happens around payment is all about the finer detail here, as sometimes full payment is due up to the point of cancellation and other times it is only up to when the event occurred. The good news is that statistically, only around 40% of contracts where force majeure applies are actually cancelled – most are renegotiated.
What does that means for you if you want to claim “force mejeure” and either pause, renegotiate or call time on a contract?
- Look carefully at the force majeure clause in your contract – reach out to me if you need a second opinion – to see if it includes pandemic, Government sanctioned shut down, or ‘Acts of God’.
- Look at the stated outcomes of a force majure event and consider what you want to achieve, a pause to the contract or a re-negotiation, or is it best to cancel?
- Look at the notification procedure; are there any time limits that you will need to comply with and issue the necessary notice.
- Start a conversation with the other party – everyone is in the same position and wants to know work will be done when it can be or that projects can be ‘paused’ where it makes sense to do so.
Overall, with force majeure clauses my advice is, the sooner you deal with the “what ifs” for your business the quicker they can become the “what next”.
Email me if you need any help or advice on contracts right now.