Expecting the Unexpected: Why Force Majeure Provisions Matter in an Uncertain World
“Stuff happens.” In business, as in life, the unanticipated, unexpected, and unprecedented can upend the most rock-solid plans or sincerest of intentions. That is why attorneys who negotiate and draft commercial contracts put so much effort into identifying and addressing every possible risk, event, or circumstance that could negatively impact their client. But as skilled and careful as a lawyer may be and as comprehensive as an agreement may be, “stuff happens” that neither party may have seen coming or imagined could come to pass. The COVID-19 pandemic and its associated lockdowns, supply chain disruptions, and other challenges certainly fell into that category.
The pandemic’s impact on businesses large and small across a wide swath of industries and parties’ inability to meet their promised contractual obligations shined a spotlight on a common provision often glossed over as boilerplate: “force majeure.” Derived from the French for “superior force,” force majeure clauses are designed to allocate risk for extraordinary circumstances that prevent performance under a contract.
While the worst of COVID may be behind us, other global commerce uncertainties, such as tariffs, supply chain disruptions, other health epidemics, and ever more frequent natural disasters, mean that force majeure provisions will likely be invoked far more than before the pandemic struck. Indeed, that is precisely what happened throughout the pandemic and in its aftermath, as businesses sought to be released from obligations and insulated from liability for their inability to fulfill their promises.
Accordingly, understanding what these clauses cover — and what they don’t — and carefully drafting them to address all issues of concern is of increasing importance to businesses so they can manage risks and navigate contractual obligations more effectively. Recent developments have made two occurrences of particular concern in the context of force majeure provisions: tariffs and supply chain disruptions.
Key Components of a Force Majeure Provision
A force majeure clause typically excuses a party from liability or performance obligations when certain unexpected events beyond their control occur. These clauses generally list specific triggering events, such as natural disasters, war, terrorism, government actions, labor strikes, and epidemics.
Key components of a force majeure clause include:
- Defined Force Majeure Events: The clause should specify events considered force majeure, such as acts of God, government actions, and pandemics.
- Causation Requirement: The clause should require the affected party to demonstrate that the event directly prevented or hindered contractual performance.
- Mitigation Obligations: Affected parties may be required to take reasonable steps to mitigate the impact of the event.
- Notice Requirements: The contract should set forth timelines and procedures for notifying the other party of force majeure claims.
- Consequences of Invocation: The clause should define whether obligations are suspended, excused, or terminated.
- Alternative Performance Mechanisms: Many contracts provide for alternative sourcing, price adjustments, or renegotiation rather than outright nonperformance due to a covered force majeure occurrence.
Courts generally interpret force majeure clauses narrowly, meaning the event in question must be explicitly covered by the contract, a point that pandemic-related litigation made abundantly clear. Parties that attempted to cite the pandemic and its associated fallout to invoke force majeure provisions usually found themselves on the losing side if the applicable provision did not specifically include terms like “epidemics,” “pandemics,” and “public health emergencies,” or “government action” or “regulatory changes” as to lockdowns, travel bans, business closures, and the like.
Force Majeure and Tariffs
The current administration has made tariffs a cornerstone of its economic approach. These government-imposed duties on imported or exported goods can significantly impact companies that rely on global commerce, as almost all do in one way or another. While increased tariffs may raise costs and disrupt supply chains, their classification as a force majeure event that would relieve a party from its contractual obligations depends on the clause’s language and interpretation.
For example, a tariff hike imposed suddenly by the administration might qualify as force majeure if the contract explicitly includes “government action” or “changes in law” as triggering events. However, predictable tariff risks, such as those resulting from ongoing trade negotiations, may not be considered force majeure.
Courts have generally been reluctant to classify tariffs as force majeure unless they render performance impossible rather than merely more expensive. Thus, businesses should carefully draft force majeure provisions to include government-imposed financial burdens where necessary.
Force Majeure and Supply Chain Disruptions
Tariffs aren’t the only things that can upend global supply chains. They are also vulnerable to a host of other unexpected disruptions. One container ship stuck in the Suez Canal or a bridge collapse in Baltimore’s harbor can send shockwaves through markets across the globe. Force majeure clauses can help address these challenges, but as noted, their applicability depends on specific contract language and the nature of the disruption.
- Material Shortages and Factory Shutdowns: If a supplier cannot obtain necessary materials due to unexpected plant closures or material unavailability, it may invoke force majeure, provided the clause covers supply chain disruptions.
- Transportation and Logistics Issues: Events such as port closures, shipping delays due to labor strikes, and unforeseen regulatory changes can disrupt contractual performance. Explicitly mentioning transportation failures in force majeure clauses can help parties avoid disputes.
- Allocation of Limited Resources: Some contracts require suppliers to allocate limited goods among customers in a fair and commercially reasonable manner when force majeure is invoked.
With force majeure provisions no longer relegated to contractual backwaters, businesses and their counsel should review and, if necessary, revise their agreements to ensure they provide protections commensurate with the risks posed by a volatile and unpredictable world.
If you have questions regarding force majeure provisions, please contact Ansell.Law Partner Seth M. Rosenstein.