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.[1]  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.[2]       

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 control.[3] In effect, the force majeure clause shifts and allocates risk between the parties to address their unique course of dealings and industry idiosyncrasies.[4]  To achieve that result, force majeure clauses are self-contained limiting provisions granting non-performance excuses for generally unforeseeable events[5] that were neither caused by the affected party, nor preventable by “reasonable measures.”[6]  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.[7]

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.[8]  Often courts and arbitral bodies will look into the “possible economic background” between the parties to ascertain the “real” reason for non-performance.[9]  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.[10]  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 issue.[11]

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.”[12]  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.”[13]  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.”[14] 

When allocating risk though, “the force majeure clause may not be ‘manifestly unreasonable’”[15] and courts are permitted to disregard overreaching contract provisions.[16] “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[17]  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.”[18]  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 overreaching.

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 non-performance. 

Declaration of a Listed or Contemplated Force Majeure Event According to the Parties’ Agreement.

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.”[19]  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,[20] followed by a “catch all” phrase to “capture” events similar to those listed.[21] 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. [22] 

However, the 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.[23]  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 meaning.”[24]

For instance, in World Trade Center, the court held that the September 11, 2001, attacks were specifically listed as a force majeure event.[25]  There, the World Trade Center sought unpaid rent from a tenant for the month of September 2001.[26]  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.[27]  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.[28]

Likewise, in Capital City the court held that specifically listed “force majeure” event are meant to excuse performance.[29]  There, plaintiff and defendant entered into a full requirements contract.[30]  Defendant ceased supplying product when it lost its supply for liquefied petroleum gas.[31]  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.”[32]  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.”[33]  The appellate court therefore reversed the district court and held that the event excused performance.[34]

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.[35]  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.[36]

This seeming 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,[37] i.e. “a hurricane hitting the Gulf Coast may be anticipated, although the effects of [the] Hurricane likely may not be.”[38]  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.[39]

Likewise, an oil crisis in some cases may be foreseeable, particularly these days.[40] 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.[41]  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.   

On 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.[42] Thus, if the “foreseeability” language is not expressly included in the force majeure clause, it very well may be inapplicable.  

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.”[43]  This principle embodies what some courts have called the “two concepts of reasonable control.”[44] 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 important.

Finally, it should be noted that this “control” inquiry is not mandated by law.[45] Therefore, parties may contract out of the control requirement by omitting it from their force majeure clause.[46] 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.”[47]  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.

The Proponent’s 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.[48]  Thus, as a general rule a party claiming a force majeure excuse must also demonstrate that the allegedly excusing event actually prevented its performance.[49]  

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.[50] 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.[51] 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,”[52] 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.

Whether the 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.”[53]  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.[54]  The evidence showed that the plaintiff voluntarily shut down its plant due to financial considerations caused by environmental regulations.[55] 

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 non-performance.[56]

Similarly, courts will consider the proponent’s actions after a purported force majeure event and consider the diligence in mitigating the event and resuming performance.

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.[57]  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.[58]  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.

Whether Some 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 oil purchaser.[59] 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.[60]

Conclusion

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. 

In-house counsel 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 majeure protections.