What is a Force Majeure Clause in a Business Contract?

If you are negotiating a contract with a supplier or customer on their terms, you will likely come across a force majeure clause. This article will explain how force majeure clauses operate, how they will affect your company, and points to consider when negotiating them. 

What is a Force Majeure Clause?

A force majeure clause is a provision in a commercial contract that seeks to limit the liability of the parties if certain events happen that make it difficult to meet the obligations under the contract. 

Force majeure clauses can feasibly apply to any circumstance, but the most common situations include:

• declarations or threats of war and armed conflict; 
• acts of terrorism;
• civil war;
• catastrophic natural disasters such as floods, forest fires, hurricanes, and tornadoes (sometimes called “Acts of God”);
• epidemics and pandemics; 
• nuclear, chemical, or biological contamination; 
• building collapse; 
• labour and other trade disputes; and
• certain third parties that fail to fulfil certain specified obligations.

What is the Purpose of a Force Majeure Clause? 

A force majeure clause allows a party to mitigate liability if an event outside their control makes it difficult or impossible to perform obligations. If such an event affects you, your business can rely on the clause to avoid the other party suing you.

To illustrate this point, let us consider a hypothetical case study. 

Case Study 

ABC Ltd enters into a contract to supply 123 Limited with widgets ABC manufactures. ABC will deliver the widgets six months from the date of the contract. 

Shortly after the contract is signed, a new respiratory illness breaks out, and within a month, the country ABC manufactures its goods in orders a full lockdown of all non-essential work. ABC’s manufacturing is not deemed essential and is therefore forced to shut down. 

If the contract does not contain a force majeure clause, 123 Limited can claim that ABC is in breach of its obligations. This may not succeed because the law will recognise “the doctrine of frustration” in some instances, similar to force majeure clauses. However, ABC runs the risk that it cannot plead frustration, and a court may find ABC in breach of its obligations. 

However, if there is a force majeure clause that includes reference to pandemics and the parties word it correctly, it is unlikely 123 can claim against ABC.

Negotiating a Force Majeure Clause

A contract must have a force majeure clause that appropriately defines the events the parties intend for it to cover.

Therefore, it is essential that you appropriately define the force majeure clause to suit the needs of your business. 

Sweeping Definitions vs Expressly Defined Definitions

For example, let us say your force majeure clause includes:

• fires or floods; 
• armed conflict, civil war or strife, or acts of terrorism; 
• pandemics or epidemics; and 
• labour disputes. 

The force majeure clause also has a provision that extends this to “any other cause beyond the parties’ reasonable control.”

Later, there is an economic collapse, and the effect is that you cannot perform your obligations. Because “economic collapse” was not expressly included, there is the chance a court might determine that the force majeure clause does not cover this event, even though you have a “catch-all” provision.

Defining Events Beyond The Parties’ Control

Just because you have included certain events in your contract under the force majeure clause, this does not mean the force majeure clause automatically applies if the events happen. For instance, suppose you have a force majeure clause that includes fires. If a fire breaks out at your company’s warehouse and you do not take reasonable steps to control the situation, the force majeure clause may not protect you. This applies even if the fire destroys your inventory and you cannot fulfil your obligations. 

This is because force majeure clauses only operate where two conditions apply:

• the parties specify an event (a fire) under the force majeure clause; and 
• if the event arises, the party relying on the clause takes appropriate steps to try and mitigate the effect of the event.

If you have reason to believe that there is a fire risk and do not take steps to control it, the law may conclude the event was not truly beyond your control. 

One-Sided Force Majeure Clauses

Two parties can create a contract that only gives one party the benefit of a force majeure clause. This is quite common for certain consumer contracts, largely because the consumer has fewer obligations than the commercial party. You should be mindful of any force majeure clause that does not extend any coverage to your business. For example, if an event arises that is included in the force majeure clause, but the force majeure does not apply to you, you cannot rely on the clause. 

Similarly, some clauses allow one party the right to designate certain events as force majeure events but do not empower the other party similarly. Therefore, though the contract may define the force majeure clause in such a way that you might benefit from it, that does not mean that you will if your supplier does not recognise an event as being covered by the force majeure clause.

For example, your supplier may reserve the right to designate a future labour strike as a force majeure event. A later strike affects your business’ ability to fulfil its obligations. However, your supplier refuses to apply the force majeure clause to the circumstances. Provided your supplier is not acting unreasonably, you may not be able to rely on the clause. 

“Only Effective Cause of Default”

If your business seeks to rely on a force majeure clause, you must be able to prove that the force majeure event was the only reason you could not fulfil your obligations. If there are, in fact, other reasons why you did not or could not comply with the terms of the contract, you will not benefit from the force majeure clause.

Key Takeaways 

A force majeure clause specifies certain events that, if they arise, may release you from your contractual obligations. To rely on this clause, you must take reasonable steps to mitigate the event’s effect. Like all contracts, the extent to which a force majeure clause will protect you depends on how well you draft it. Therefore, you should ensure a solicitor drafts and reviews your force majeure clause.

If you need help with your start-up business, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us on 0808 196 8584 or visit our membership page.

Frequently Asked Questions 

• declarations or threats of war and armed conflict; 
• acts of terrorism;
• civil war
• catastrophic natural disasters such as floods, forest fires, hurricanes, and tornadoes (sometimes called “Acts of God”);
• epidemics and pandemics; 
• nuclear, chemical, or biological contamination; 
• the collapse of a building; 
• a building fire; 
• labour and other trade disputes; and
• certain third parties that fail to fulfil certain specified obligations.