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July 12, 2023
Force majeure clauses took center stage during the COVID-19 pandemic – and understandably so.
The pandemic stress-tested the global supply chain in a way never seen before, leading businesses across the supply chain to seek protection.
The litigation and literature surrounding force majeure clauses – which allocates the risk of loss if performance is hindered, delayed or prevented because of an event that the parties could not have anticipated or controlled – throughout the pandemic focused on the pandemic itself.
Was the pandemic a force majeure event?
Was the pandemic reasonably foreseeable?
And while some of these questions have been resolved, force majeure clauses have not faded into the background.
In fact, force majeure provisions remain at the forefront of transactions at each link of the supply chain.
So, while we are returning to business as usual, businesses should not revert to pre-pandemic ways of evaluating force majeure clauses.
Simple concept
The concept of a force majeure clause is simple.
A standard force majeure clause may read like this:
Neither party shall be liable or responsible to the other party, or be deemed to have defaulted under or breached this agreement, for any failure or delay in performing any term of this agreement, when such failure or delay is caused by, or results from, acts beyond the impacted party’s reasonable control, including, without limitation, the following force majeure events: (a) acts of God; (b) flood, fire, earthquake, epidemics, pandemics or explosion; (c) war, invasion, hostilities, terrorist threats or acts, riot or other civil unrest; (d) government order, law or actions; (e) embargoes or blockades in effect on or after the date of this Agreement; (f) national or regional emergency; (g) strikes, labor stoppages or slowdowns; and (h) other similar events beyond the reasonable control of the impacted party.
The clause is quite broad – note that it exempts either party from performance of any term of the agreement, provided that non-performance is caused by one of the defined force majeure events, including the all-encompassing item of “similar events.”
Suitability depends on transaction
Whether such a broad clause suits your business depends on the transaction.
For buyers and suppliers, there are several key items to look for in a force majeure clause. First, it is vital to understand who the clause applies to.
Though some clauses excuse non-performance for any party to the agreement, other agreements may limit the application of force majeure clauses to just one party.
When reviewing a force majeure clause, it is prudent to ensure your business is covered by the clause.
If you assume the force majeure clause encompasses all parties to the agreement, and later experience a force majeure event, you may be shocked to learn its protections do not flow to your business.
Along the same lines, it is crucial to understand what breach is excused.
Again, while some clauses provide that the non-performance of any term in the agreement is excused by a force majeure event, others may excuse only limited instances of non-performance.
For example, a force majeure clause may excuse non-performance of certain key performance indicators embedded within a contract, but may not excuse non-performance of the entire agreement.
Others may excuse non-performance of basic and inconsequential terms while insisting non-performance of the primary objective of the agreement will not be excused in any event. For businesses including force majeure provisions in contracts, it is vital to ensure you are only going so far as to cover those terms of the agreement you feel may be excused under the appropriate circumstances.
For businesses evaluating a proposed or existing force majeure clause, carefully review the clause to determine what breach is excused.
Different clauses, approaches
Another question is what force majeure events excuse performance.
Different clauses may take different approaches.
Some may narrowly define force majeure events, demarcating each individual event that constitutes a force majeure event, while excluding all others.
Others leave an open-ended clause that provides for broad protection.
Most strike a balance by individually naming events that constitute force majeure events, while leaving room for potential other events by including catch-all provisions, such as “all similar events” or “any other events.”
Force majeure events may also vary based on whether the event itself is within the “control” or “reasonable control” of the party making the claim.
Businesses should look carefully at the applicable force majeure clause before attempting to invoke it.
Finally, force majeure provisions often have specific steps to be taken.
The clauses often require written notice of the event within a certain amount of time, a description of the event and an obligation to take reasonable steps to mitigate the impacts of the event.
Clauses may also provide that, if the event continues for a certain amount of days, either party may terminate the agreement.
Businesses must ensure these procedures are strictly followed to ensure the invocation of the clause is successful and not subject to attack.
In short, all businesses across the supply chain should keep a watchful eye on force majeure clauses in their contracts.
They may be numerous, spanning across agreements with dozens or more entities, making it all the more critical for your business to have a firm understanding of what each clause provides protection for.
Gone are the days when force majeure clauses may be treated as a routine provision that is consistent across agreements.
Nick Lubenow is a Green Bay-based attorney with the law firm of von Briesen & Roper. He focuses his practice on business and transactional matters including contracting, corporate governance, business structuring and succession planning.
