Drafting Advice: Avoiding Disastrous Force Majeure Clauses
 

Drafting Advice: Avoiding Disastrous Force Majeure Clauses

Posted on 02-28-2018

By: Timothy Murray MURRAY, HOGUE & LANNIS

Botched Force Majeure Clauses Expose Your Client to Needless Risk

As if on autopilot, attorneys sometimes tack onto their contracts generic force majeure clauses, just because everybody else does it, without bothering to tailor the clause to the particular transaction. Force majeure clauses are among the most misused provisions in the contract drafting milieu, and a botched force majeure clause can expose clients to enormous risk. It doesn’t need to happen. Entire books are written on this subject, but this short article raises a few of the most troublesome issues as food for thought. Remember to consult the law of the pertinent jurisdiction because there are variations from state to state.

What Parties Automatically Get Without a Force Majeure Clause

For starters, we can’t fully understand a force majeure clause if we don’t understand the rights contracting parties have without one. Contracting parties automatically get the benefit of two related gap-filler doctrines that can excuse a party’s obligations when an unanticipated, supervening event fundamentally alters the nature of the parties’ contract: (1) impossibility, or as it is commonly called nowadays, impracticability, and (2) frustration of purpose.

Impossibility/Impracticability

The doctrine of impossibility can be traced to Taylor v. Caldwell, 1 where the owner of a music hall was excused of liability for failing to make the hall available due to an accidental fire that destroyed the building. Because literal impossibility was required to excuse a party’s performance under this doctrine (e.g., death or destruction of the subject matter), contractual force majeure clauses that expanded the reasons to be excused from performance became all the rage.

Modern contract law, both at common law and under the Uniform Commercial Code (U.C.C.), has repackaged the impossibility doctrine as impracticability, though sometimes it’s still called impossibility, and now, literal impossibility is no longer required. But old habits die hard, and parties continue to routinely include force majeure clauses, sometimes when the clauses don’t add anything to what the law already provides.

Impracticability has been described in many ways, but essentially it is when a party is excused of his or her responsibilities because performance has been made excessively burdensome— impracticable—by a supervening event that was not caused by the party seeking to be excused and that is inconsistent with the basic assumption of the parties at the time the contract was made. The supervening event must be, in some sense, unforeseeable (but not inconceivable)—that is, so unlikely that a reasonable party would not have guarded against it in the contract.

Frustration of Purpose

This aptly named doctrine focuses on the parties’ purpose in making their contract and has nothing to do with a party’s inability to perform. It applies where a supervening event fundamentally changes the nature of a contract and makes one party’s performance worthless to the other. The best explanation for it is an example. In the landmark case of Krell v. Henry, 2 Henry rented a room from Krell for the purpose of viewing the coronation of King Edward VII. But the King fell ill, and the coronation was postponed. The very purpose of the contract—a room with a view of the coronation—was frustrated, and performance was excused.3

The Gap-Filler Doctrines Can Be Lost by Contract Parties can lose the benefit of these gap-filler doctrines by including a force majeure clause that covers the same ground. The esteemed Judge Richard Posner wrote: “If . . . the parties include a force majeure clause in the contract, the clause supersedes the [impossibility] doctrine . . . [L]ike most contract doctrines, the doctrine of impossibility is an ‘off-the-rack’ provision that governs only if the parties have not drafted a specific assignment of the risk otherwise assigned by the provision.”4

In Aquila, Inc. v. C. W. Mining, 5 the court held that C. W. Mining (CWM) could not invoke these gap-filler doctrines to be excused of its contractual obligation to supply coal because the parties’ contract contained a force majeure clause that expressly spelled out when supervening events would excuse performance. The terms of the force majeure clause—including a notice requirement—had not been satisfied, so “CWM cannot rely on common law defenses and the U.C.C., thereby circumventing the terms and limitations that the parties negotiated in the Contract.”6

The protections of the gap-filler doctrines can also be lost by contractual provisions other than traditional force majeure clauses, as shown by Trs. of Conneaut Lake Park, Inc. v. Park Restoration, LLC (In re Trs. of Conneaut Lake Park, Inc.).7 The Trustees of Conneaut Lake Park (TCLP) contracted with Park Restoration for the latter to provide operational and management services to a building called the Beach Club. The parties’ contract provided: “In the Event of termination for any reason, Park Restoration warrants and represents that it will vacate the premises ensuring that it is in broom clean condition without any damage to any equipment or property.” Subsequently, the Beach Club was destroyed by a fire of unknown origin. TCLP terminated its agreement with Park Restoration and filed an adversary proceeding claiming breach of contract because Park Restoration failed to honor its obligation to return the premises in “broom clean” condition “without any damage.” Park Restoration argued that its obligations under the contract were excused under the doctrine of impossibility of performance because the existence of the Beach Club was necessary to carry out the purpose of the contract. The court rejected this argument because the plain words of the contract required Park Restoration to leave the premises “in broom clean condition without any damage.” The parties’ express allocation of risk left no room for the gap-filler doctrine of impossibility or impracticability to excuse Park Restoration of its obligations.

A Generic Force Majeure Clause May Not Provide as Much Protection as the Gap-Filler Doctrines

In drafting force majeure clauses, parties sometimes characterize force majeure events as a generic listing of unforeseen contingencies that fit the description of impracticability. The problem is, if one of those contingencies occurs, a party’s performance would be excused even without a force majeure clause. Why bother having the clause if it merely restates what the law already provides?

Worse, attempts to list every contingency that might be considered a force majeure event might miss the one that actually occurs. Listing every possible contingency is, of course, an impossibility since no drafter is omniscient. Nevertheless, the canon of construction expressio unius est exclusio alterius would exclude any item that is not specifically listed. There are ways to draft around that, discussed below.

In short, an improperly drafted, generic force majeure clause can leave the parties with fewer protections than they would have under the law without it. If you’re going to have a force majeure clause, you need to do it right.

Drafting Force Majeure Clauses

Don’t Mirror the Doctrine of Impracticability

The force majeure clause is a tool to allocate the risks of supervening events—you can do that in an infinite variety of ways. Your force majeure clause shouldn’t mirror the doctrine of impracticability—if it did, it’s not necessary. Most importantly, your clause should not require that the force majeure events be unforeseeable, impossible, or impracticable.

Listing Force Majeure Events—Part I: Draft Around the Canons of Construction

The clause will list as force majeure events general contingencies (discussed in this section), and it should also list contingencies specific to your client (discussed in the next section). With respect to the general listing, there is an infinite variety of lists.8 As noted above, an attempt to list every contingency that might be considered a force majeure event is, itself, an impossibility. If you list some contingencies, the canon of construction expressio unius est exclusio alterius would exclude any item not specifically listed. Therefore, an incomplete listing may unwittingly surrender some of the protections that the common law and the U.C.C. provide without a force majeure clause.

The conventional wisdom counsels drafters to accompany any listing of force majeure events with a catch-all provision in an attempt to capture events beyond the ones specifically listed. But drafting the catch-all presents its own challenges. If it merely says “. . . or any other events or circumstances beyond the reasonable control of the party affected,” the canon of construction or interpretation ejusdem generis likely would limit the meaning of the catch-all to the same type of events as those listed specifically. Thus, the catch-all needs to make clear that it is not limited to the same type of events. A good example is “. . . or any other events or circumstances not within the reasonable control of the party affected, whether similar or dissimilar to any of the foregoing.

Listing Force Majeure Events—Part II: Talk to the Client

Often, the most important drafting is the part where the lawyer listens to the client before a single word is put on paper. To properly draft against the risk of supervening events, you need to talk to your client about what might go wrong in the course of performance of the contract that will make it intolerably burdensome to the client. You may need to urge your client to think the way you do and not assume things will go as planned after the contract is signed—clients generally aren’t as pessimistic as lawyers.

While no one can envision everything that might go wrong, there’s no excuse for missing the big risks. If your client is contracting to supply a product, what might happen to interfere with its production or supply? What might make the price of the components intolerable? If your client’s supply of a product depends on a raw material from a sole source of supply, the continued availability of that raw material ought to be listed as an express condition to your client’s performance obligations (and call it an express condition so that there is no doubt in the event of a dispute). Perhaps your client will need to be excused from performing if the price of a particular raw material exceeds a certain level.

In the absence of a specific contractual provision, courts are loath to characterize financial hardship due to a supervening event as a force majeure event. In Kyocera Corp. v. Hemlock Semiconductor, LLC, 9 Kyocera, a producer of solar panels, contracted under a take-or-pay arrangement to purchase from Hemlock a silicon called polysilicon that was used in the manufacture of solar panels. The contract contained a force majeure clause that provided: “Neither Buyer nor Seller shall be liable for delays or failures in performance of its obligations under this Agreement that arise out of or result from causes beyond such party’s control, including without limitation: . . . acts of the Government . . . .” Thereafter, the Chinese government gave solar panel producers illegal subsidies, which prompted the United States to impose import tariffs on Chinese-manufactured components of solar panels.

Kyocera claimed that this caused the price of polysilicon to rise significantly, and it invoked the force majeure clause. The court held that despite the acts of the Chinese and U.S. governments, the force majeure clause was not triggered. Kyocera was able to perform, albeit under financial conditions not to its liking. The very purpose of a take-or-pay contract is “to insure payment to the producer in the event of substantial change in the marketplace.” Importantly, the court noted: “Plaintiff opted not to protect itself with a contractual limitation on the degree of market price risk that it would assume. It cannot now, by judicial action, manufacture a contractual limitation that it may in hindsight desire, by broadly interpreting the force majeure clause to say something that it does not.”10

The lesson is that if you want your client to be discharged of its obligation to perform in the event of a specific contingency, spell it out plainly. You will never hear a judge complain that a contract is too clear for him or her. Don’t hide what you want in the niceties of a generic listing of force majeure events—a court may not agree that the particular risk is encompassed by it. When you spell out the risk, don’t characterize or qualify it as unforeseen or impracticable because a court may conclude it is neither. If your client fears that being so blunt might hurt the negotiations or raise unnecessary red flags with the other party, make certain your client understands the legal risk of not contracting with specificity so that he or she can make an informed decision about how to proceed.

The Nuts and Bolts

When a force majeure event occurs, the contract needs to require the affected party to give notice and to keep the other party apprised of the progress of the event. Your clause might contain language similar to this:

Upon occurrence of a force majeure event (as defined below), the non-performing party shall promptly notify the other party that a force majeure event has occurred and its anticipated effect on performance, including its expected duration. The non-performing party shall furnish the other party with periodic reports regarding the progress of the force majeure event. The non-performing party shall use reasonable diligence to minimize damages and to resume performance.

You may want to impose time limits on the duty to notify and even make notification an express condition to invoking the force majeure clause.

When a force majeure event occurs, should it discharge the affected party’s obligations altogether? Or should it merely serve as an excusable delay to give the party additional time to complete performance? If so, how much additional time should it receive? It is critically important that the delay should not extend indefinitely— the timing needs to be spelled out. Perhaps some events should allow immediate discharge while others merely serve as an excusable delay for a stated period of time. As but one example, the client’s supplier may have suffered a catastrophic fire, given notice of the event, and informed the client that the supplier will be back up and operating in nine weeks. But the client needs a prompt supply. The client learns that another supplier can fill the need but requires a long-term commitment. A carefully drafted clause anticipates this possibility and affords the client the opportunity to cancel the initial contract.

You don’t have to deal with all supervening events that affect your client in a force majeure clause. Any number of other clauses can spell out how certain supervening events are dealt with. For example, you could include a flexible-pricing clause that allows your client to pass on increased costs to the other party. You can also have a sort of reverse force majeure clause that makes clear that an otherwise-impracticable event will not be grounds for relief.11

Conclusion

When contracts are being written, clients concentrate on putting together a good business deal, but attorneys focus a lot on protecting clients in the event things go wrong. Guarding against supervening events is a daunting task, and force majeure clauses are difficult to draft. The harm from a botched force majeure clause can be enormous. That’s why we need to avoid the temptation to draft these clauses by cutting and pasting from other contracts, as we might do for a garden-variety notice provision, without tailoring the language to the present transaction. There are no shortcuts to meticulous drafting when it comes to force majeure clauses.


Timothy Murray, a partner in the Pittsburgh, PA law firm Murray, Hogue & Lannis, is coauthor of the Corbin on Contracts Desk Edition (2017) and writes the biannual supplements to Corbin on Contracts.


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For additional guidance in drafting a force majeure clause, see

> DRAFTING A FORCE MAJEURE CLAUSE

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> FORCE MAJEURE CLAUSES

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> CONTRACT DRAFTING LANDMINES

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For a discussion on the common risk allocation mechanisms used in commercial contracts, see

> ALLOCATING RISK IN COMMERCIAL CONTRACTS

RESEARCH PATH: Commercial Transactions > General Commercial and Contract Boilerplate > Contract Boilerplate and Clauses > Practice Notes

For an overview on the various reasons that a party to a contract can justifiably avoid performance, see

> UNDERSTANDING EXCUSES FOR NONPERFORMANCE – CONDITIONS FOLLOWING CONTRACT FORMATION

RESEARCH PATH: Commercial Transactions > General Commercial and Contract Boilerplate > Contract Boilerplate and Clauses > Practice Notes

1. 3B. & S. 826, 32 L.J., Q.B. 164 [1863]. 2. 2 K.B. 740 [1903]. 3. For a recent case that talks about Krell v. Henry, see Wall v. Altium Grp., LLC, 2017 U.S. Dist. LEXIS 44857 (W.D. Pa. Mar. 28, 2017). 4. Commonwealth Edison Co. v. Allied-General Nuclear Services, 731 F. Supp. 850, 855 (N.D. Ill. 1990). 5. 2007 U.S. Dist. LEXIS 80276 (D. Utah Oct. 30, 2007). 6. Id. at *16 7. 564 B.R. 495 (Bankr. W.D. Pa. 2017). 8. Here’s one suggested by Corbin on Contracts: Neither party shall be responsible for any resulting loss if the fulfillment of any of the terms or provisions of this agreement is delayed or prevented by revolutions, insurrections, riots, wars, acts of enemies, national emergency, strikes, floods, fires, acts of god, or by any cause not within the control of the party whose performance is interfered with, which by the exercise of reasonable diligence such party is unable to prevent, whether of the class of causes enumerated above or not. Corbin on Contracts § 74.19 (2017). 9. 886 N.W.2d 445 (Mich. Ct. App. 2015). 10. 886 N.W.2d 445 (Mich. Ct. App. 2015) 11. For example: In the event the demised premises are damaged or destroyed by fire or other casualty, or damaged by the demolition of any portion of the building necessitated by the enforcement of any law or Ordinance, or declared unsafe by any public authority, the Landlord shall, at own cost and expense, immediately repair, reconstruct and replace the demised premises, including improvements, extensions, alterations and additions to building made by Landlord or Tenant, all such work to be done in compliance with State Laws and City Ordinances. Marcovich Land Corp. v. J. J. Newberry Co., 413 N.E.2d 935, 939 (Ind. App. 1980).