The Top Ten Force Majeure Imposters
Jul 01, 2009 Top Ten Download PDF
Kate Henry Gonzalez, Legal Counsel, Lafarge North America Inc.
Economic downturn. Broken machinery. Increased fuel costs. Unresolved union issues. Thorns in the side of any purchaser or supplier? Definitely. But do these “soft” excuses really amount to force majeure events that would permit a party to delay or suspend performance or delivery under an agreement, or even terminate a contract? The list below of ten “faux” majeure scenarios becoming more and more prevalent in today’s contracts should be of increasing concern to any party on the purchasing or receiving end of the deal. Before glossing over that seemingly benign “Section 12: Force Majeure” or “Article XVI – Delays”, take stock of these new additions to the “excusable events” category of modern contract theory.
1. Abnormal Weather Conditions
Two consecutive days of rain is abnormal for Yuma, Arizona. Two consecutive days without rain is abnormal for Hilo, Hawaii. Does this mean the occurrence of either should excuse performance? No. Instead, look to limit weather-related force majeure events to truly serious weather anomalies such as hurricane, tornado, earthquake, cyclone, typhoon, blizzard, tidal wave, tsunami or flood.
2. Telecommunication Error
This is a great example of a small issue that suddenly has the potential to greatly impact your agreement. Your fax didn’t come through, so now it’s a force majeure event? Not every glitch in the daily operation of a business should amount to a force majeure event that allows for suspension, delay or even termination of an agreement. If it seems like a minor issue that the parties could easily resolve, it doesn’t belong in the force majeure clause.
3. Strikes, Lockouts & Labor Disputes
The argument for deleting this scenario is simple: the party claiming this could be a force majeure event is the only party with control over its employees. Union contract negotiations gone awry should not become a burden for an unrelated party to bear. At the very least, delete “lockouts”, as well as “labor disputes”, or anything similarly broad. Limit “strikes” to “industry wide strikes with a direct impact on this Agreement”, and be sure to require mitigation, including providing alternate personnel to do the job.
4. Increased Fuel Costs
The price of oil has been hitting all-time highs for the last few years, so it should really come as no surprise to either party to a contract that fuel costs could, and likely will, escalate further in the future, especially over the life of a long-term contract. Increased fuel costs would be more at home in the price provision of the contract, capturing price increases over the agreed to base figure as a pass-through to the purchaser.
5. Unstable Business Relationships
Here, one of seller’s vendors might have merely threatened to stop supplying parts on account of chronically late payments, and buyer now finds himself on the receiving end of a force majeure notice that in essence serves as a “time out” for seller to find another vendor. Fair? Not really. This is a classic example of a contemplative clause, attempting to include the cause, rather than the effect, as a force majeure event. Something along the lines of “termination of material vendor arrangements through no fault of seller” would be far more palatable here.
6. Broken Equipment/Equipment Malfunction
Have you ever had one of those little knobs on your oven come off? Would you tell your daughter you couldn’t bake her birthday cake because of it? Read literally, a missing knob makes for “broken equipment” – even though the equipment in all likelihood functions perfectly fine. Similarly, a “malfunction” could be minor and easily repairable, but if it’s in the force majeure clause, there would be no impetus for that party to get it fixed and running as soon as possible. Again, strike these concepts if you can, or at the very least curb their effect by requiring the “malfunction” be a material breakdown that renders the equipment completely inoperable, and even then, require it be fixed within a reasonable timeframe given your contract terms.
7. Inability to Obtain or Operate Sufficient Trucks/Locomotives/Vessels
Let’s get this straight: Company A contracted with Company B to deliver various products by next Monday, and now the only driver is out sick, or the truck is in the shop, and it’s a force majeure claim? Reel it back in by piling on the conditions: “for a duration of more than ___ business days after exhausting all commercially reasonable efforts, including but not limited to sourcing alternate vehicles/vessels and/or operators, using alternate modes of transportation, and allowing the other party the opportunity to arrange the same.” Adding that these mitigation efforts are at the sole cost and expense of the party claiming force majeure is also a good way to ensure this clause won’t find its way into that next round of drafts.
8. Lack of Capital/Investment
The issue here is two-fold: first, how much money has to be “lacking” for this to constitute a force majeure event, and second, is this truly outside of that party’s commercially reasonable control? If NewCo has 100 equal investors and one backs out, it’s technically “lack of investment”, but is unlikely to have such a grave effect on the business that performance should be excused. Striking this clause altogether would be the best option, followed by setting a high floor that the monetary deficiency has to reach before it amounts to force majeure.
9. Unforeseen Market Conditions
The external counterpart to number 8 above, “unforeseen market conditions” is unfortunately, but not surprisingly, making its way into more and more contracts, given the current economic slowdown. The problem here, in addition to this clause essentially amounting to an out for buyers if they can get a cheaper price elsewhere and an out for sellers if they can hock their wares for more to another party, is how exactly does one define “unforeseen”? If we’re in a recession, are plummeting profits really “unforeseen”? Like consequential damages, this clause is too volatile, and in effect renders the contract terminable at will, since virtually anything could be deemed an “unforeseen market condition”.
10. Anything Outside X’s Control
Ah, the catchall. As if the nine faux majeure events preceding this one weren’t outrageous enough, here’s the sneaky blanket clause added in at the end of the laundry list just in case something wasn’t covered. If striking this won’t work, at least limit it to “outside the party’s commercially reasonable control” – this puts the standard at the commercial level and ensures it’s reasonable. For added security, craft the clause as “outside the party’s commercially reasonable control for similarly situated companies in the same geographical area.”
For the past five years, I’ve reviewed a different force majeure clause nearly every single day, in contracts ranging from elevator repair, to warehouse storage, to airport bars, to highway rest stop kiosks, to cement supply, to solid fuel sourcing. I like to think I’ve seen the full gamut of force majeure clause permutations. This once “gentle giant” of catastrophic natural disasters and unavoidable acts of government and war has slowly but surely morphed into the landfill provision of every contract: a textual dump for every “what if” that could ever possibly impact performance. When possible, negotiate these trendy monsters out of your agreements, under the auspices that each strays a tad too far from the original notion of a truly unavoidable contingency.