Force Majeure Clauses: Protecting Against the Unforeseeable

by Baker Donelson
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Force majeure clauses are a very important, but often overlooked, provision in all contracts, and are particularly important in construction and supply contracts. Whether a force majeure clause is included in a contract, and the precise language of the clause, will determine the enforceability of the contract and the parties’ obligations thereunder if certain uncontrollable outside events—a “force majeure”—prevents performance. Accordingly, contracting parties are well-advised to negotiate the terms of a force majeure clause to protect their interests and prevent excessive exposure to liability in the event of a force majeure.

A “force majeure” literally translates from French as a “superior force,” but is defined by Black’s Law Dictionary as “An event or effect that can be neither anticipated nor controlled.” A force majeure contractual clause allocates risk among the contracting parties if performance becomes impossible or impracticable because of such an event, and may allow for termination or suspension of the contract, and the parties’ duties under the contract. Certain statutes also impact the enforcement and interpretation of force majeure clauses. See, e.g., Article 1873 of the Louisiana Civil Code.

Examples of force majeure events include wars, revolutions, riots, labor strikes, and certain “Acts of God” (e.g., hurricanes, tsunamis, earthquakes, etc.). Accordingly, the inclusion of a force majeure clause is of particular importance when the contractual work will be performed in areas of the world where civil unrest is more common. Revolutions and civil unrest throughout North Africa and the Middle East during the recent “Arab Spring,” and more recently in Venezuela, Thailand, and the Ukraine illustrate the importance of such clauses and the possibility of civil unrest preventing contractual performance. Also, while civil unrest and revolutions may be more likely in certain parts of the world, extreme weather events or labor strikes that prevent contractual performance can occur anywhere, at any time, as evidenced by the 2005 Hurricane Katrina in New Orleans, the 2011 tsunami in Japan, the 2012 Hurricane Sandy in New York and New Jersey, and various labor strikes in the western Europe and the United States.

Force majeure clauses should be included in leases, shipping contracts, man-power contracts, gas supply contracts, and, perhaps most importantly, construction contracts. Parties should negotiate the precise language of the force majeure clause, as this language will determine what events are covered by the clause, and the procedure a party must follow in order to invoke the clause to excuse its contractual performance, as well as the steps it must take to overcome the force majeure event (e.g., many force majeure clauses require a party to act with reasonable diligence or dispatch to overcome the force majeure).

Furthermore, parties to multiple related contracts (e.g. upstream and downstream gas supply contracts or prime and sub construction contracts) are also well-advised to negotiate the force majeure language in the prime contract so that it is clear what effect a force majeure preventing performance under the related contract has on required performance under the prime contract (e.g., if and for how long performance is excused under the prime contract because of the force majeure preventing performance under the related contract). See Ergon-West Virginia v. Dynegy Marketing & Trade, 706 F.3d 419 (5th Cir 2013). 

The language of the force majeure clause should be as clear as possible, and if a court finds the language to be ambiguous, it will allow outside “parol” evidence to be introduced to determine the parties’ intended meaning of the clause. A party has even attempted—unsuccessfully—to rely on broad and ambiguous force majeure contractual language to argue that the 2008 economic downturn that led to the “Great Recession” constituted a force majeure that excused its performance under a contract, thus illustrating the importance of the precise language in force majeure clauses.  See Elavon, Inc. v. Wachovia Bank, Nat'l Ass'n, 841 F. Supp. 2d 1298 (N.D. Ga. 2011).

Finally, it should be noted, that a force majeure defense to performance under a contract is not absolute, and the defense may not be available to a party whose own fault contributed to his inability to perform under the contract. See Michael Bush v. Bud’s Boat Rental, LLC, No. 2013-CA-0989 (La. Ct. App. Feb. 26, 2014)

Nevertheless, because of the dramatic impact a force majeure clause has on potential liability and avenues of redress of contracting parties, parties should negotiate the terms of these clauses to best protect their interests.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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