When drafting any agreement, whether it be a purchase/sale agreement, distribution agreement, manufacturing agreement, etc. parties should always keep in mind one question: “What if…?” The purposes of memorializing agreements in writing are many – not simply to neatly organize the “business terms.” One important reason agreements are reduced to writing is to allow the parties to detail and specify what the process will be, and what remedies are available to the parties if the “something goes wrong.” If the world were perfect and nothing ever went wrong, many legal documents would be superfluous – a handshake deal and oral understanding would be all that is required – the world isn’t perfect.
The force majeure section of an agreement is one place where parties discuss the process and remedies of what happens if/when “something goes wrong.” I have included below some key items to consider when drafting or negotiating force majeure provisions. To be clear, these considerations are applicable “generally” – like any provision, the force majeure provision should be tailored to industry standards and other party-specific factors.
Why Have a Force Majeure Clause? The primary reason parties desire to include a force majeure clause is to allocate and quantify risk. The parties do this by negotiating what events are (and what events are not) force majeure events (see section below). Essentially, if an event is a “covered event” (meaning it is a force majeure event), the risk is shifted onto the non-performing party (stated otherwise, the party that was obligated to perform under the agreement is now excused from performance). Alternatively, if an event is “non-covered event” – meaning it is not a force majeure event, the risk is shifted onto the performing party (stated otherwise, the party who is obligated to perform under the agreement must either (i) perform pursuant to the agreement, or (ii) breach the agreement (and potential be liable for damages associated therewith)). As you can see, deciding what events are “covered” by the force majeure clause is very important when allocating and quantifying each party’s risk.
What Events are Covered? Typically, the force majeure clause covers two types of events: (i) specific, and (ii) general.
The list of specific events often negotiated in force majeure clauses are many. A few of the most common are: war, terrorist acts, changes in law, embargoes, fires, floods, earthquakes, epidemics, pandemics, financial recession, labor strikes, cyberattacks, nuclear catastrophes, acts of civil or military authority, and power shortages. As you can see, the specific inclusions are extremely dependent upon the industry to which the agreement pertains.
In addition to specific inclusions, force majeure clauses can also include a general “catch-all provision” such as “any act beyond a party’s reasonable control” or “an act of God.” These provisions are typically points of negotiation, as they can been seen as all-encompassing and unfairly shifting too much risk from the performing party to the non-performing party.
What Standard Applies? When drafting and negotiating a force majeure clause, it is important to understand what standard triggers the relief afforded by the clause. Meaning, in order for a party to properly invoke the clause, must performance be impossible? What if it is just impracticable? How about unduly burdensome? What if performance is not going to be impossible, but it is just going to be delayed? These are all concepts that drafters and negotiators should think about when reading and revising force majeure provisions. Parties should keep in mind that the standard will impact the level of proof required to show that such clause has been properly invoked – generally, a higher (stricter) standard will require more evidence to show such standard was met.