This article briefly examines American force majeure law, focusing on
developing the legal elements of the defense for in-house counsel to consider
when negotiating contracts or managing a force
majeure dispute in arbitration or litigation.
The Purpose and Application of Force Majeure Clauses.
In essence, a force majeure clause only matters to the
extent that it modifies the common law doctrine (and/or UCC provisions) on
impossibility of performance, by formally allocating the risk of
non-performance between the parties in exchange for a mutually perceived agreed
economic benefit. Thus, force majeure clauses serve two functions: setting out the parties’
agreement as to which events will suspend or excuse performance under the
contract, and then allocating the risk of that non-performance.
In that vein, the
parties will generally enumerate in their force
majeure clause the specific events that will excuse non-performance, and
then specify their agreed upon “quantum” or measure of foreseeability and
effect, the force majeure clause
shifts and allocates risk between the parties to address their unique course of
dealings and industry idiosyncrasies. To achieve that result, force majeure clauses are self-contained
limiting provisions granting non-performance excuses for generally
unforeseeable events that
were neither caused by the affected party, nor preventable by “reasonable
measures.” In order to relieve a party from
non-performance, the force majeure event
must be the “proximate cause” of the non-performance in accordance with the
parameters of the parties’ agreement.
Because force majeure completely excuses
one-side’s non-performance of its contractual obligations, the burden of proof for
force majeure rests on its initial proponent. Often courts and arbitral bodies will look
into the “possible economic background” between the parties to ascertain the
“real” reason for non-performance. So, the decision maker will consider the
proponent’s due diligence in overcoming the force
majeure event, and will require the proponent to present proof that it acted
reasonably to mitigate the event and to resume performance as soon as possible. Accordingly, a court or arbitral panel
will likely consider evidence about alternatives that the proponent could have
pursued to overcome the force majeure event,
including evidence of how similarly situated third parties have dealt with the
Since each force majeure clause is different, each
is interpreted according to the parties’ relationship, industry, exchanged
economic benefits and understandings. The finder of fact will therefore analyze
both the plain language of the provision and the surrounding facts,
circumstances, relationship and intent of the parties. Simply, each force majeure clause is “construed in
each circumstance with exacting attention to the specific wording of the
provision as the scope and effect of the clause may vary with each contract.” The key, therefore lies in the language
of the individual clause.
That, of course brings
the analysis right back to its starting point: “what adverse risks were
contemplated by the force majeure clause
and therefore allocated between the parties as excuses for non-performance in
the agreed exchange of mutual economic benefit?” That question determines what events
are, and are not, events of force majeure
under the parties’ agreement, and it is the key to either establishing or
overcoming a force majeure defense.
When Negotiating A Force
Majeure Clause Overreaching Can Backfire.
Historically, the law
abhors contractual non-performance; however, if the parties are “sophisticated
commercial [entities] there is no reason to excuse them from the operation of
the force majeure clause which they
freely negotiated.” Thus, a well drafted force majeure clause provides “a flexible concept that permits the
parties to formulate an agreement to address their unique course of dealings
and industry idiosyncrasies.”
When allocating risk
though, “the force majeure clause may
not be ‘manifestly unreasonable’” and
courts are permitted to disregard overreaching contract provisions. “While
there is not a separate duty of fairness and reasonableness that can be
independently breached, there is a general obligation of good faith” that
controls the parties’ agreements and that permits a court to set aside
the agreement if it violates that duty.
That being said, the
court or arbitrator will only set aside the clause if “in the light of the
general commercial background and the commercial needs of the particular trade
or case, the clause involved is so one-sided as to be unconscionable under the
circumstances existing at the time of the making of the contract.” The decision maker must therefore look
at the unique situation. The
analysis will not be the same if the parties are two sophisticated companies contracting
at arms-length with full legal representation, as compared to where one party
is relatively unsophisticated or in a materially unequal bargaining
position. In-house counsel should therefore
caution the contract negotiators to frame the force majeure terms carefully and clearly and to avoid any
Using The Force Majeure Clause.
The legal requirements
for properly asserting and defending a force
majeure declaration can be roughly broken down into three requirements: (1)
the event was listed or contemplated by the force
majeure clause; (2) the event was neither foreseeable nor controllable by
its proponent; and, (3) the event was the proximate cause of the
Declaration of a
Listed or Contemplated Force Majeure Event According to the Parties’
Initially, a force majeure clause is meant to “refer
to certain circumstances and events that are recognized as being above and
beyond the control of contracting parties and that could not reasonably have
been foreseen or avoided by the due care of either of the parties.” That creates an inherent tension when
the parties sit down to draft their force
majeure clause: if the events must be unforeseen and beyond the parties’
control, how can those events possibly be enumerated or contemplated in the force majeure clause?
The solution is usually
a veritable litany of possible events,
followed by a “catch all” phrase to “capture” events similar to those listed. Those
events generally include “acts of God” and other extreme weather events, along
with natural disasters, fires and floods.
The general rule is
that events specifically listed in force
majeure clauses are included, and non-specified events that fall within the
same “general kind or class of events” as those listed events will likewise
constitute a force majeure event.
contractually-specified events do not necessarily need to be “true” or classic
events of force majeure in and of
themselves, so long as they are specifically listed by the parties. Thus, even events that could be foreseen
or contemplated (such as material shortages, strikes or lockouts) can be force majeure events so long as the
parties agree and include them in their contract. When interpreting a force majeure clause, the terms will be given their “normal legal
For instance, in World Trade Center, the court held that
the September 11, 2001, attacks were specifically listed as a force majeure event. There, the World Trade Center sought unpaid
rent from a tenant for the month of September 2001. The contract specifically listed certain
events, including “acts of third parties,” and contained a clause stating that similar
events “different from the foregoing” list would also constitute force majeure events. Since the attacks were undisputably an
act of a third party outside the proponent’s control, the court found a force majeure event as a matter of law.
Likewise, in Capital City the court held that
specifically listed “force majeure”
event are meant to excuse performance. There, plaintiff and defendant entered
into a full requirements contract. Defendant ceased supplying product when
it lost its supply for liquefied petroleum gas. Plaintiff sued to enforce payment, and the
defendant alleged that the force majeure clause
excused his non-performance because it specifically mentioned the “exhaustion,
reduction, or unavailability of liquefied petroleum gas at the source of supply
from which deliveries are normally made hereunder.” Since the clause did not specifically
limit the source of the supply, the court held that the force majeure event could arise from the loss of the normal
supplier even if the event was not a classic “force majeure.” The appellate court therefore reversed
the district court and held that the event excused performance.
The Party Must
Establish That The Force Majeure Event Was Neither Foreseeable, Nor
Within the Proponent’s Control.
To constitute force majeure and excuse contractual performance,
the event must have been specifically unforeseeable at the time of contracting
unless the event is specifically listed in the force majeure clause. The basic rationale behind that rule is
that a party’s failure to contractually protect itself from a foreseeable
contingency is essentially an assumption of that risk.
inconsistency (i.e. the events must
be “unforeseeable” even though the parties must contemplate them in their force majeure clause) becomes more evident
when the parties apply the clause to a particular event. Some situations may be foreseeable
generally, but not specifically, i.e. “a hurricane hitting the Gulf Coast
may be anticipated, although the effects of [the] Hurricane likely may not be.” Thus, it is not the event itself that
need always be unforeseeable, many times it is the unforeseen effect of that event that matters most.
Likewise, an oil
crisis in some cases may be foreseeable, particularly these days.
However, a court may consider the same oil crisis to be unforeseeable if the
court focuses on the specific causes of the crisis or on the crisis’ specific
effects on the contract at issue. Thus, a proponent of a force majeure event should focus on the
unforeseen aspects of the alleged disruptive event, as opposed to the general
(and alone likely foreseeable) category of the event.
the other hand, some courts have held that the foreseeability test should not
be applied if it is not specified within the force majeure provision that an event must be unforeseeable. Thus,
if the “foreseeability” language is not expressly included in the force majeure clause, it very well may
Force majeure clauses usually exclude events that are “reasonably
within the control of either party on the theory that a party should not be
excused from performing its contractual obligations when it is the cause (or
otherwise controlls) the event precluding performance.” This
principle embodies what some courts have called the “two concepts of reasonable
First, a party may not affirmatively cause a force majeure event. Second, a party may not rely on an event excusing
performance if it could have taken reasonable measures to prevent the event. While that distinction is subtle, it is
Finally, it should be
noted that this “control” inquiry is not mandated by law. Therefore,
parties may contract out of the control requirement by omitting it from their force majeure clause. As
always, parties are generally free to set their own standards for measuring the
performance of contractual obligations as long as those criteria are not
“manifestly unreasonable.” Again, in-house counsel should consider
the particulars of the situation when negotiating whether to include (or
exclude) such a requirement from their contracts, and that decision often
depends on assessing the likelihood of which side could invoke (and therefore
benefit from) such a clause.
Non-Performance Must Be Proximately Caused by the Force Majeure Event.
In addition to the above
limitations, courts usually impose a causality requirement between the
occurrence of the event and the claimed excuse. Thus, as a general rule a party claiming
a force majeure excuse must also demonstrate
that the allegedly excusing event actually prevented its performance.
For instance, in Wheeling Valley Coal Corp. v. Mead, a
bankruptcy trustee of a mining company entered into a contract with the lessee
of a mine.
The contract provided for a minimum payment of royalties by the trustee to the
lessee and included a force majeure
provision that excused payment of the minimum royalty upon the happening of certain
events, including interruption of mining due to governmental acts. Shortly
after execution of the contract, the government enacted regulations that
increased the cost of labor in the mines and limited the price the trustee
could charge for the coal. The
lessee brought suit to recover an arrearage in the payment of the minimum
royalty, and the trustee defended by claiming that new regulations constituted
“governmental acts” excusing its performance under the force majeure clause.
The court rejected the
force majeure defense, concluding
that the financial insolvency of the operator was the actual cause for the
nonperformance of the minimum payment obligation, not the governmental acts. Thus,
the allegedly excusing event must also be “the actual cause of nonperformance,” not
just the claimed cause.
Most modern force majeure clauses include specific
causation language that any event or any consequences of that event that results
in or causes the failure to perform, or delays that party in the performance
of, any of its obligations is a force
majeure event. Thus, a
proponent must be prepared to present evidence linking its actual non-performance
to the force majeure event and the
“continued circumstances” caused thereby.
Proponent Exercised Due Diligence In Both Preventing and Overcoming the Event.
Similar to the analysis
of causation, a court may consider the proponent’s due diligence in avoiding
the force majeure event. For example,
in Macalloy, the court held that “force majeure clauses excuse
non-performance only where the reasonable expectations of the parties have been
frustrated due to circumstances beyond their control.” There, the plaintiff sought relief from
its obligation to perform under a contract based on the “plant shutdown” language
contained in the force majeure
provision. The evidence showed that the plaintiff
voluntarily shut down its plant due to financial considerations caused by
The court found that the
plaintiff was fully aware of the environmental regulations, and the EPA’s intention
to enforce them, and that the plaintiff simply failed to mitigate those issues
before the EPA began enforcing them.
Accordingly, the plaintiff could not satisfy its burden of showing that
the event was beyond its control, and it could therefore not declare force majeure to excuse its
courts will consider the proponent’s actions after a purported force
majeure event and consider the diligence in mitigating the event and
For instance, in Wilson v. Talbert, the court decided
that a lessee under an oil and gas lease took an unreasonably long time to
repair a ruptured storage tank in light of the surrounding circumstances, and
therefore the lease was terminated for non-production. There, the tank ruptured in March, and
the lessee made no effort to repair it until July of the same year. Furthermore, there was evidence that
another storage tank sat adjacent to the damaged one and could have been used
as an alternative with only minor repairs. Thus, the court found that the lessee
did not use reasonable diligence to mitigate the force majeure, and the lease was therefore canceled.
As with the “control”
issue, the parties can adjust or eliminate the pre and post-facto due
diligence obligations when negotiating the force
majeure clause. Post-facto due diligence requirements
provide financial impetus for a force
majeure claimant to overcome the event as quickly as possible, where it
might otherwise prefer excused non-performance.
Other Possible Factor or Event Not Qualifying as Force Majeure Was the
Actual Reason for Non-Performance.
Finally, courts will
often look behind the stated force
majeure event to ascertain the “real” cause of non-performance. And, if that cause is actually adverse
economic consequence, than the event likely will not qualify as force majeure.
For instance, in Langham-Hill Petroleum, Inc. v. Southern
Fuels Co., the court denied the force majeure excuse sought by a crude
The purchaser claimed that the Saudi Arabian effort to regain market share by
flooding the market with crude oil and causing a dramatic fall in world oil
prices prevented the purchaser from performing the contract. However, the court
looked behind that stated reason and instead held that the real reason for the
oil purchaser’s non-performance was the adverse economic consequence of
depreciated oil prices – not governmental action.
Thus, the court
reasoned that if “fixed-price contracts can be avoided due to fluctuations in
price, then the entire purpose of fixed-price contracts, which is to protect
both the buyer and the seller from the risks of the market, is defeated.’” Because the real reason for the
non-performance was not the alleged force
majeure event, the court rejected the declaration.
In sum, a force majeure clause is an important
tool to allocate risks of contractual non-performance between parties. To be effective, such a clause needs to
be carefully tailored to the particular contract and circumstances. It should be as specific as possible in
identifying events and allocating burdens (particularly with regard to avoiding
or curing events) and should not be overreaching, or be otherwise unreasonable
on its face.
Because force majeure clauses completely excuse
non-performance, the proponent will usually bear the burdens of proving that
the claimed event falls within the clause; that the event was not caused by the
party (or was otherwise in its control); that the event proximately caused the
party to be unable to perform; and that the proponent could not have avoided
the event through exercise of due diligence to resume performance as soon as
possible. Other factors,
particularly economic drivers, can and will be examined to establish
alternative causalities for the non-performance other than true force majeure.
should carefully consider how to contractually adjust each of these burdens
when negotiating the terms of a force
majeure clause. Merely copying
“standard” force majeure language
from one contract to another can result in the lost opportunity to garner
significant client savings, either by facilitating a favorable declaration or
limiting an opponent’s ability to utilize force