In Short
- A force majeure clause excuses parties from fulfilling obligations due to unforeseen events.
- It’s important to define events that trigger the clause and outline the steps to take when invoking it.
- Not all contracts have a force majeure clause, and common law provides limited relief for unexpected events.
Tips for Businesses
Review your contracts to ensure they include a well-drafted force majeure clause. Define the events covered clearly and understand the procedures for using the clause if an unforeseen event disrupts business. Regularly update contracts to reflect current risks and stay protected.
Table of Contents
You may have seen or are familiar with force majeure clauses in commercial contracts. These clauses outline the rights and responsibilities of each party when dealing with situations that are beyond anyone’s control, like natural disasters, wars, or pandemics like COVID-19. These can make it impossible for businesses to meet their contract obligations.
Force majeure can be an essential element of a contract. So, if you are a business, it is important to understand what a force majeure clause does, how it may impact your responsibilities or remedies in a contractual arrangement and whether or not your insurance covers certain force majeure events.
Why are Force Majeure Clauses Important?
If you are a business, a force majeure clause protects against unforeseen and unavoidable circumstances that may prevent you from fulfilling your responsibilities. For example, when COVID-19 lockdowns and supply chain disruptions made it impossible for many businesses to operate normally or meet contractual deadlines, force majeure clauses would come into play, ensuring that businesses like yours would avoid breaching contracts. With these clauses, businesses avoid costly legal battles and do not have to continue operating under extraordinary circumstances.
The primary function of a force majeure clause is to suspend a party’s contractual obligations temporarily when a qualifying force majeure event occurs. Consequently, a force majeure event that prevents one party from fulfilling or performing their contractual obligations will not amount to a breach of contract. A well-drafted force majeure provision will ultimately excuse a party from delay or non-performance for events beyond their control. Likewise, it may allow either or sometimes both parties to terminate a contract.
Force majeure clauses act as an important risk management tool by clearly outlining the scope of covered events, notification requirements, and remedies such as temporary suspension or termination rights. They also address any expected mitigation efforts. These clauses allocate contractual rights and responsibilities appropriately when unforeseen disruptive events happen.
What Key Issues Should I Be Aware of With a Force Majeure Clause?
Carefully drafting your force majeure clause is essential. Lawyers at LegalVision can assist you with this because:
- the precise wording of the clause will determine if you can rely on it; and
- the clause may or may not be helpful when an unforeseen event occurs.
Definition
Generally, a broader definition of force majeure benefits you if you are the supplier of goods or services. If you are a customer, you are less likely to be impacted by a force majeure event. In this case, a narrower or more specific definition suits your needs better.
Therefore, include a clear and precise list of example events in the definition of ‘Force Majeure Event’. The general principles of a force majeure event are:
- the event was outside your reasonable control; and
- you could not prevent the event’s consequences.
Sometimes, exclusions from the definition of a force majeure event will apply if the event is reasonably foreseeable. Exclusions can be problematic for a supplier. For instance, although COVID-19 might have been unexpected in 2019/2020, its ongoing effects are likely foreseeable today. As a result, a supplier will have less success using COVID-related shipping delays as an ‘unforeseen event’ or force majeure event.
Additionally, consider what actions or responsibilities a force majeure event affects. For example, you may be able to pause the obligation to finish manufacturing goods but would still need to pay outstanding invoices or fees. A force majeure clause aims to provide your business with relief from performing core services or deliverables if a force majeure event prevents you from meeting your obligations.
What Happens if a Force Majeure Event Occurs?
A force majeure provision must guide a party through the steps they must take. Below are principles you might consider including in your force majeure clause.
| Notice | A balanced contract will require an affected party to notify the other party of the force majeure event as soon as practicable. So, as soon as you become aware that the force majeure event impacts your performance under the contract, you must notify the other party. Your notice should include specific details of the event, the anticipated length, and the steps you are carrying out to mitigate the event’s impact. |
| Ongoing Obligations | You may include a provision requiring that both parties continue fulfilling obligations unaffected by the force majeure event. This ensures that an event disrupting a nonessential part of the contract will not derail the agreement. |
| Mitigation | If the other party is more likely to be affected by a force majeure event, you may choose to include an obligation for the affected party to mitigate the effects of the event. |
| Suspension or Termination | The force majeure clause should generally only suspend the provision of goods or services for the period the event affects the supply. Consider whether a force majeure event shall enable a party or both parties to terminate the contract if the event is drawn out (for example, if it extends for weeks or months). |
| Engagement of Third Parties | Can a third party be employed by the not affected party to carry out the services or deliver the goods if the affected party can no longer perform due to a force majeure event? This type of provision is not overly common, but it can be beneficial if you are the party less likely to be affected. |
Consider Whether a Force Majeure Clause is Relevant
The importance of including a comprehensive force majeure clause varies based on the type of goods or services being provided, the arrangement between the parties and the potential for disruptions beyond a party’s control.
A force majeure provision may not be as critically important for businesses that provide services remotely with minimal physical presence. For example, if you are an architect drafting construction plans digitally without needing to be on-site, extraordinary events like natural disasters are less likely to directly impact your performance.
However, for businesses involving significant physical operations or supply chains, a force majeure clause becomes exponentially more vital. Construction companies, manufacturers, logistics providers, and others involved in on-site activities are inherently more vulnerable to disruptions from catastrophic events. A severe hurricane, for instance, could damage facilities, disrupt labour, or cripple transportation networks – all potential grounds for invoking force majeure.
Risks of Not Having a Force Majeure Clause
As with insurance, a force majeure clause is useless unless a force majeure event occurs. If you are engaging with another business and enter a Contract for Services, you should ensure a contract lawyer drafts a force majeure clause into your agreement. Without a force majeure clause, you risk being in breach of the contract and having to pay damages to the other party, despite the event being out of your control.
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Key Takeaways
Force majeure clauses often serve as key terms in commercial contracts. A force majeure clause can protect a party from breaching the contract and facing damages if an event or circumstance beyond their reasonable control occurs. When you review or draft a commercial contract, take care to:
- assess whether you need a force majeure clause, for example, think about which unforeseeable events you want to protect against;
- decide how broad or narrow the definition of force majeure should be when listing possible force majeure events; and
- outline the process that the parties must follow after a force majeure event.
If you need help reviewing or drafting a force majeure clause, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 visit our membership page.
Frequently Asked Questions
In general, a force majeure clause is triggered by an event beyond either party’s control that prevents or hinders the performance of the contract. For the duration of a force majeure event, some contractual obligations of the contract will be put on hold.
In most cases, the clause will also define force majeure, which typically features a non-exhaustive list of example events that would trigger the clause. These could include natural disasters such as floods, fires, or earthquakes.
Yes. Without a force majeure clause, you risk being in breach of the contract and having to pay damages to the other party if circumstances beyond your control prevent you from performing your side of the contract.
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