Navigating Force Majeure in Commercial Contracts: Strategic Drafting for Business Resilience

In recent weeks, a widespread power outage impacted millions across Spain, Portugal, and southern France, disrupting commerce, transportation, and essential services. This large-scale disruption serves as a powerful reminder of the unpredictable events that can derail business operations, and the importance of being contractually prepared.

Force majeure clauses are a critical risk management tool in commercial agreements. They allocate responsibility when unforeseen events prevent one or both parties from fulfilling their contractual obligations. To be effective, these clauses must be carefully tailored to the specific needs and risk profiles of the contracting parties. Below are key considerations for drafting force majeure provisions that are both comprehensive and enforceable:

1. Defining the Scope of Force Majeure Events

• Broad vs. Specific Language: Clearly articulate what constitutes a force majeure event. While general terms like “acts of God” offer flexibility, listing specific events—such as natural disasters, pandemics, cyberattacks, or government-imposed restrictions—provides clarity.

• Tailored Definitions: Suppliers may prefer broader definitions to shield against liability, whereas customers often seek narrower terms, excluding foreseeable risks or those that should be mitigated through the supplier’s business continuity planning. Having said that, if you’re a customer with a high level of risk under the contract, you may want to minimize this risk through a broad force majeure clause. For example, if you must purchase high minimum volumes of goods or incur a hefty penalty, then consider a broader force majeure clause to reduce your risk if an event happens that prevents you from making the minimum purchases.

2. Establishing Causation

• Direct Impact Requirement: The clause should require that the force majeure event directly prevents, delays, or hinders performance. This ensures a clear causal link between the event and the non-performance, reducing ambiguity in enforcement.

3. Notice Obligations

• Timely Communication: Include a requirement for the affected party to notify the other party within a specified timeframe. This allows for proactive contingency planning and preserves trust in the commercial relationship.

4. Mitigation Duties

• Reasonable Efforts Standard: Demonstrating good faith efforts can be crucial in both legal and business contexts. To this effect, your force majeure clause should obligate the impacted party to take reasonable steps to mitigate the effects of the event, even specifying obligations a party must follow when invoking force majeure. This is particularly important if you are the party less likely to invoke force majeure.  For example, if you’re the customer using a carrier to transport goods, as part of the force majeure clause, you will want the carrier to use its best efforts to promptly deliver the cargo to its final destination at no additional cost to you, the customer.

5. Duration and Termination Rights

• Time Limits: Specify how long a force majeure event can suspend obligations before triggering termination rights.
• Termination Clauses: Provide clear guidance on when and how either party may terminate the agreement if the disruption persists beyond a defined period.

6. Consequences of Invocation

• Suspension vs. Termination: Clarify whether obligations are temporarily suspended or if the contract may be terminated outright.
• Cost Allocation: Address how costs incurred due to the force majeure event will be handled—whether shared, absorbed individually, or subject to renegotiation.

7. Governing Law and Jurisdiction

• Legal Consistency: Ensure the clause aligns with the governing law of the contract. Jurisdictions vary in how they interpret and enforce force majeure provisions, so local legal advice is essential.

Conclusion

Force majeure clauses are more than boilerplate language—they are strategic safeguards. By thoughtfully drafting these provisions, businesses can better manage risk, preserve contractual relationships, and maintain operational continuity in the face of the unexpected.

If your organization is reviewing its contractual risk exposure or needs assistance drafting or negotiating force majeure clauses, don’t hesitate to reach out for tailored legal guidance.

Image by vectorjuice