Understanding Contract Terms (post 4): Force Majeure
In today’s post, we continue our series on understanding contract terms. In this fourth post, we focus on the term force majeure.
Webster’s Dictionary defines force majeure as “an event or effect that cannot be reasonably anticipated or controlled”—for example, such as hurricane, flooding, earthquake, war, riots, etc. The term is French, and is translated to mean “superior force.”
This term is included in contracts as a way to relieve each parties’ liability or obligation when an extraordinary event occurs or circumstances arise that are beyond the control of the parties and prevent one or both of the parties from satisfying their obligations under the contract. It is most commonly used in insurance, construction, and supply contracts.
Typically, the force majeure clause does not excuse a party’s non-performance completely, but only suspends performance for the period of time of the force majeure, e.g. until the flooding subsides or the riots cease. Keep in mind, this clause is not intended to excuse either party’s negligence or misconduct, or other situations that could have been avoided had the party exercised due care, e.g. risks due to natural, common consequences of external forces.
For contracts where time is of the essence, the force majeure clause is often limited to the extent that a party must take reasonable precautions to prevent, or at least limit the effects of external forces. For example, in Seattle it rains (a lot), so a contract may contemplate the inclement weather by requiring a builder to supply necessary rain cover in order to continue work despite rain.
The importance of this clause, especially in long-term, high-price supply contracts, cannot be overstated. For a major supply contract, there can be millions of dollars in liability if one party fails to supply the product as detailed in the contract because of an ‘Act of God’ or because ports are shut down due to a strike or riot. Rather than impose significant liability on that party, the force majeure clause will excuse the failure to supply the product (at least during the force majeure). Without this clause, the supplier may be on the hook for the damages that resulted from the non-performance.
If you’d like to learn more about force majeure provisions or general contract drafting advice for your business, please feel free to contact us today.