According to the American Meteorological Society’s State of the Climate in 2017 publication, 2017 was one of the hottest years in recorded history. With an increasing number of heat-related events occurring around the world this summer – from raging fires in California to Arctic Sweden and down to Greece on the sunny Mediterranean, as well as record-breaking heat in Japan, Korea and parts of Europe – scientists are now able measure the impacts of human-induced climate change on extreme weather events, using a combination of observation, current information from weather stations and historical data. In a recent study, atmospheric scientists have concluded that, as a result of climate change, extreme heat events will become more frequent in the coming decades and occur over a much greater portion of the planet.
In the economic context, the World Economic Forum identified the five top global risks predicted to have the greatest impact on the global economy over the next decade in its Global Risks Report 2018. Of those five risks, four are related to climate change. A “global risk” is defined in the report as “an uncertain event or condition that, if it occurs, can cause significant negative impact for several countries or industries within the next 10 years.” For the second year in a row (see Global Risks Report 2017), the lion’s share of the Global Risk Report is focused on risks associated with climate change. In its description of environmental risks specifically, the 2018 report touches on several broad themes, including major property and infrastructure damage, depleted resources for industry, and serious harm to economic activity.
Naturally, heightened awareness of these risks will have practical commercial implications for things such as business contracts, particularly where a force majeure clause is invoked. A force majeure clause operates to relieve a party of contractual obligations in certain circumstances, which often includes environmental conditions (often referred to as “acts of God”) which render performance under the contract impossible. As climate change increases exposure to extreme weather events, contracting parties may be more likely to invoke force majeure clauses to avoid liability where conditions outside their control have occurred. For example, severe flooding could impede the production or transportation of goods, triggering force majeure clauses throughout the supply chain.
Climate change-related events may also motivate contracting parties to manage these issues upfront at the negotiating phase. Boilerplate force majeure clauses often require the triggering event to be both unforeseen and impossible to prevent. The extent to which climate change-related events are unforeseen, and how far parties must go to avoid such events and perform under their contracts, are legal issues that businesses are only now starting to explore. By considering such issues at the negotiating stage, rather than waiting until a dispute arises, contracting parties will be in a better position to manage the potential impacts of climate change-related risks on their operations down the road.
In a constantly evolving world, contract provisions should be regularly reviewed and tailored to address dynamic business conditions. Where contracts include a force majeure clause, parties should consider how the term is defined and whether the clause includes express mitigation obligations. In order to be an effective risk management and risk allocation tool, a force majeure clause should be carefully considered, rather than simply relying on boilerplate language. This article outlines the potential role of the force majeure clause in the context of climate change, and summarizes key considerations and effective drafting techniques.
Overview of Force Majeure Clauses and Events
Force majeure literally means “superior force.” As such, the force majeure clause “excuse[s] a party from liability if some unforeseen event beyond the control of that party prevents it from performing its [contractual] obligations.” By adopting a force majeure clause, “contracting parties can increase the predictability of their relationship by identifying the circumstances that will exclude performance.” There is no universal definition of what constitutes a force majeure event. Given the inherent difficulty in predicting unforeseeable events, force majeure clauses are often incredibly broad, and outline risks including but not limited to: fires, earthquakes, droughts, floods, war, embargo, revolution, terrorism and strikes. However, this breadth has in large part been reined in by both national courts and arbitral tribunals who strictly interpret foreseeability, require impossibility of performance, or both.
To facilitate predictability, contractual definitions of force majeure commonly set out specific force majeure events that are tailored to the business relationship and the industry, and then include a catch-all provision to cover unanticipated events beyond the reasonable control of a party. By specifying a particular event, the burden of establishing that an event was beyond a party’s reasonable control can be shifted to the party relying on force majeure. Within the context of adverse weather conditions that may be caused by climate change, we would expect that a more severe weather event is required – perhaps more akin to a natural disaster – than merely inclement weather.
Do Force Majeure Clauses Need a Rethink?
Despite their ubiquity, the Supreme Court of Canada has not heard a case regarding a force majeure clause since 1975’s Atlantic Paper Stock Ltd. v St. Anne-Nackawic Pulp and Paper Company Limited (“Atlantic Paper”). In Atlantic Paper, the Court summarized the nature of the force majeure clause, and the standard to which they are held, as follows:
An act of God clause or force majeure clause ... generally operates to discharge a contracting party when a supervening, sometimes supernatural, event, beyond control of either party, makes performance impossible. The common thread is that of the unexpected, something beyond reasonable human foresight and skill ... Was the change so radical as to strike at the root of the contract?
Against this standard of unforeseeability and impossibility of performance, increasingly robust climate data may actually make it more difficult for parties to argue force majeure. For example, if extreme weather events become more common in certain regions and therefore more foreseeable, parties will need to change the way contracts define responsibility under force majeure as it relates to suspension, allocation of goods and services for partial disruption, and termination.
These risks are especially pressing in commodity and construction contracts; recent arbitral decisions have seen force majeure claims based on flooding and even refugee crises rejected on the basis of foreseeability.
Drafting Force Majeure In The “New Normal” of Climate Change
Despite the present difficulty in successfully invoking a force majeure clause, they are inherently equipped to address the very types of risks that climate change will exacerbate. The Global Risk Report 2018 notes that environmental risks have continued to grow in prominence, and that “the truly systemic challenge here rests in the depth of the interconnectedness that exists both among these environmental risks and between them and risks in other categories…”.
In light of these interconnected risks, the ICC Force Majeure Clause 2003 (the “ICC Clause”) represents an emerging consensus around the component parts of an effective force majeure clause. Specifically, the ICC Clause features a general force majeure formula, as well as a list of events the occurrence of which will alter the balance in favour of the invoking party.
Read together, paragraphs 1 and 4 of the ICC Clause provide that unless otherwise agreed, where a party to a contract fails to perform one or more of its contractual duties, and that party proves:
- that its failure to perform was caused by an impediment beyond its reasonable control; and
- that it could not reasonably have been expected to have taken the occurrence of the impediment into account at the time of the conclusion of the contract; and
- that it could not reasonably have avoided or overcome the effects of the impediment,
then that party will be relieved from its duty to perform its obligations under the contract from the time at which the impediment causes the failure to perform, if notice is given without delay.
Furthermore, paragraph 3 of the ICC Clause lists the following risk events:
- War (whether declared or not), armed conflict or the serious threat of same (including but not limited to hostile attack, blockade, military embargo), hostilities, invasion, act of a foreign enemy, extensive military mobilisation;
- Civil war, riot rebellion and revolution, military or usurped power, insurrection, civil commotion or disorder, mob violence, act of civil disobedience;
- Act of terrorism, sabotage or piracy;
- Act of authority whether lawful or unlawful, compliance with any law or governmental order, rule, regulation or direction, curfew restriction, expropriation, compulsory acquisition, seizure of works, requisition, nationalisation;
- Act of God, plague, epidemic, natural disaster such as but not limited to violent storm, cyclone, typhoon, hurricane, tornado, blizzard, earthquake, volcanic activity, landslide, tidal wave, tsunami, flood, damage or destruction by lightning, drought;
- Explosion, fire, destruction of machines, equipment, factories and any kind of installation, prolonged break-down of transport, telecommunication or electric current; and
- General labour disturbance such as but not limited to boycott, strike and lock-out, go-slow, occupation of factories and premises.
This model clause clearly parallels the many ways in which climate change may impact and trigger force majeure clauses; many of the events included in the ICC Clause are in line with what numerous scholars, organizations, and government agencies recognize as the myriad of effects of climate change.
As such, because the force majeure clause is bound only by the creativity of its drafters, it may actually find a new level of utility in the context of climate change. For instance, one obvious solution to the issue of foreseeability is to explicitly eliminate it from the clauses themselves. Furthermore, as climate science continues to develop, contracting parties have increasingly valuable and detailed information available which can be used to more easily draft bespoke force majeure clauses that specifically address the most pertinent risks. For example, the weather-related events above can be narrowed or expanded on the basis of severity, seasonal changes, and more.
Expressly eliminating foreseeability from the clause itself removes the uncertainty of whether a force majeure claim will meet the generally high standard of courts and tribunals. It also encourages parties to focus their drafting in the confidence that they will be protected against the climate change-related risks that are most applicable to the contract and relationship.
Takeaways For The Force Majeure Clause Of The Future
In summary, the following elements should be considered when negotiating a comprehensive force majeure clause:
- explicit exclusion of a foreseeability test;
- requirement for prompt notice of a force majeure event, and regular updates thereafter on the status of the force majeure event and efforts to overcome the event;
- requirement of due diligence to overcome the cause of a force majeure event;
- requirement to take action to mitigate damages;
- requirement to perform to the extent economically practicable;
- inclusion of triage terms (e.g. management of available inventory);
- allocation of costs to deal with changed circumstances (e.g. including a price adjustment clause); and
- provision that the contract may be terminated by the non-affected party after a designated period of time if performance is not resumed.
The occurrence of adverse weather conditions in previously unexpected locations as a result of climate change (such as the poleward shift of tropical storm systems) may also have an impact on risk allocation between contracting parties. For example, a party may require that a more expansive range of adverse weather conditions be included in the concept of force majeure, such as flooding, drought, landslides, hailstorms and fire (including bushfire), and prolonged periods of extreme heat, as well as more severe events such as tsunamis, cyclones, tornadoes, earthquakes and other natural disasters.
Parting Thoughts and Next Steps
This year’s Global Risks Report outlines the increasing urgency of climate risk and its potential impacts on industry and the global economy. With climate science continually developing, and “acts of God” potentially becoming more predictable, the continued utility of the force majeure clause will depend on creative drafting by parties who recognize these growing risks.
Companies taking a forward-looking approach on climate change-related risks to their operations often start with assessing the potential impact of greenhouse gas regulations on their production and supply chain, with a view to managing and, where appropriate, allocating risk. This process can involve assessing current contracts and evaluating how climate change-related risk is allocated.
Broadly, contracts should be reviewed for the presence of regulatory provisions and the ability of the parties to adjust prices based on increased production costs. As it relates to force majeure clauses, contracts should be reviewed for:
- whether any force majeure clauses have a foreseeability exclusion, change in law terms or terms relating to environmental regulation;
- consistency between force majeure clauses among contracts along the supply chain (e.g. a force majeure event excusing a supplier’s performance under a supply contract will not necessarily excuse the party’s own performance under customer contracts); and
- “hell or high water” or similar clauses that explicitly require performance or impose damages regardless of force majeure
The opportunity to renegotiate or renew contract provisions may provide the opportunity for parties to better address climate change-related risks and to review the provisions for overall quality.