Few U.S. businesses have been able to escape the disruptions caused by Hurricanes Harvey and Irma early in 2017’s hurricane season. The back-to-back storms have interfered with fuel and product supply and demand and manufacturing, distribution, and other essential business activities. They have caused considerable losses.
During and in the wake of the storms, businesses across the country have taken a closer look at the force majeure clauses in their business contracts. While these clauses can be overlooked as “boilerplate” form provisions, like other boilerplate their wording can become extremely important when disaster strikes.
Including and Drafting Force Majeure Clauses
Force majeure, meaning “superior force” in French, can relieve a party from performing duties under the contract in certain circumstances. The circumstances may include those deemed beyond the party’s control and that make performance inadvisable, commercially impracticable, illegal, or impossible. Apt examples include natural disasters like hurricanes, floods, earthquakes, and other events commonly referred to as “acts of God.” However, they may also apply to man-made disasters including include war, terrorism, civil disorder, supply shortages, and labor strikes.
Without a force majeure clause in an agreement, parties may rely on less specific common law remedies such as impracticability and frustration of purpose, which may be less predictable in interpretation and much less favorable to the party whose performance is impeded. Therefore, it is imperative that every business consider whether its supply and production agreements contain a specifically drafted force majeure clause.
Like other contract provisions, force majeure clauses may come in many typical forms which can be customized to meet the reasonable needs of the contracting parties. Some standard provisions are worded too narrowly or even too broadly, so it is important to make sure that it provides reasonably sufficient protection for any party needing it. For example, some provisions only excuse performance when it is impossible, rather than impractical (untimely, expensive etc.). Other provisions may list certain circumstances that excuse performance, rather than including a catchall such as “other unforeseeable events beyond the control of the parties.”
Enforcing Force Majeure Clauses
When disaster looms or is in progress, one of the first steps will be to evaluate a business’ major agreements and its force majeure clauses, as well as to determine whether a contracting party or counter-party may invoke the clause. The terms of the contract may be ambiguous as to whether the event qualifies, and the party seeking to rely on the clause may have the burden of establishing the occurrence of a force majeure event.
The terms of the contract are likely to specify specific and detailed notice requirements that may be required, as well as a timeline for providing such notification. Businesses will review agreements to determine if either party is subject to mitigation or allocation requirements. Many agreements require the impacted business to use “best efforts” and/or act “in good faith” to resume normal operations in the wake of a force majeure event. A contract will also often state which obligations may be deferred or relinquished, and which duties may remain in force.
Because dealing with hurricanes and other disasters can be unexpected and costly, it is always best to review any applicable force majeure provisions for the business’ major agreements.
Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Charles Yuen, at 201-806-3364.