Force majeure is an old legal concept that often seems tied to the events in our newspaper headlines. Not long ago force majeure was discussed because of September 11 and Katrina. More recently, force majeure provisions have made headlines in the business world as a result of the current financial crisis. For example, in a recently settled suit, Donald Trump invoked a force majeure clause in the loan agreement for his Trump International Hotel and Tower in Chicago claiming the world financial crisis as an extraordinary event that should relieve him of his contractual obligations.
These headlines illustrate that the unforeseeable can become current reality. Recent events are examples of how contracting parties can use force majeure provisions to account for future uncertainties and to allocate risk to their advantage.
Historic Overview and Differences in Interpretation
Force majeure is French for superior or irresistible force. Force majeure excuses a party from liability for contractual obligations because of events that are beyond the control and without the fault or negligence of the party excused. The resulting impossibility or increased costs of performance protect parties from being held responsible for contractual duties. Even ancient legal systems recognized doctrines—such as impossibility—that are encompassed in force majeure.
While the “irresistible” forces of force majeure events include acts of God, they also typically include wars and insurrections and sometimes conventional commercial events such as labor disputes, supply interruptions and equipment failures.
Differences in the interpretation of force majeure language have created uncertainty for drafters of such clauses and their clients. To illustrate, even in the four state jurisdictions where Dykema has its offices there is a wide variation in court interpretation.
On one end of the spectrum, Texas and Michigan courts do not rely on common law principles of force majeure. Instead, these courts strictly follow only a contract’s express terms. In fact, a 1991 case states that “no Michigan case addresses the doctrine of force majeure,” and in the years that followed, only two cases construing Michigan law have even mentioned the term force majeure. A force majeure event in Texas and Michigan is exclusively what the contract dictates. Drafting clear and comprehensive force majeure clauses is vital in these and other jurisdictions that rely on strict contractual construction.
In other states, courts occasionally use common law principles to guide their decisions. Although courts in California and Illinois first consider the plain language of a force majeure clause, these courts often fall back on common law principles as “gap fillers” to derive a contract’s full meaning. Even though California and Illinois courts use common law interpretations to round out their analyses, the need to draft a complete and unambiguous force majeure clause remains necessary to prevent judges from “filling in blanks” with common law approaches which may not reflect a party’s attempt to allocate the risk of an identified or generic group of irresistible forces.
More Than Boilerplate — Force Majeure Clauses to Allocate Risk
Contracting parties and attorneys often overlook the boilerplate language of force majeure clauses even though they can mold these provisions to their advantage in order to allocate specific risks between parties and eliminate the uncertainty of common law interpretations.
Through negotiation, the parties determine who will bear the risk of a party’s inability to perform because of a force majeure event. Most often, this negotiation centers on the definition of a force majeure event. If a specified force majeure event occurs, the nonperforming party is excused from its obligations to perform (and the other party is allocated the risk of the event and bears the loss stemming from excused nonperformance.) Conversely, if an event is not included in the definition of force majeure, the risk of loss falls on the nonperforming party who would be held liable because its breach is not excused.
In negotiating the definition of force majeure, each party should assess the probability that particular events may prevent its performance and should therefore negotiate to include themore likely events in the force majeure definition to shift the risk of occurrence to the other party. For example, an employer of union laborers might wish to include a provision defining labor disruption into their force majeure definition and thereby be able to excuse its nonperformance on this account.
One method of defining force majeure events within a contract is to simply list all the events or acts that are to be treated as force majeure events. Although this creates a concrete and unambiguous list, the obvious flaw is that it requires the parties to dream up every possible event, and as time passes, the list may prove to be inadequate in anticipating all possible circumstances.
The list might include simply “any events that are unforeseeable” by the parties. Although virtually any event is foreseeable to a person with sufficient imagination, some courts have determined that only unforeseeable events as determined in hindsight by a judge or jury are an excuse for nonperformance. Courts reason that the parties could have protected themselves during contract negotiations from foreseeable events, and a nonperforming party should not be excused when perhaps it received the economic benefit of assuming the risk that actually occurred.
Boilerplate force majeure language may require that a court decide whether the event that occurred was “unforeseeable” and also whether it was of sufficient effect to excuse performance. For instance, some courts only apply force majeure clauses when the event “completely prevents” performance, while others adopt more flexible “substantially affecting” or “materially affecting” performance standards.
Thus, a generic force majeure clause may not solve the problem for which it was designed. A thoughtful and well-crafted force majeure clause can be a successful tool to allocate risk between parties and prevent unforeseeable headaches from becoming reality.