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Predicting the unforeseeable in contracts

| Sep 24, 2020 | Business Law |

As the last few months instructed us, things happen and do happen in business. Under the law, unexpected events can excuse a party from stopping or excusing their performance under a contract. A force majeure contract clause is an important part of business law that can have a huge impact on transactions.

Force majeure

Force majeure is a French term that means greater force. Traditionally, these were an act of God or an event for which a party cannot be held responsible. These include acts of nature such as a hurricane or tornado. It has also encompassed human actions such as war or terrorism.

A force majeure clause is included in contracts to remove liability for these types of natural and unavoidable catastrophes. These events must also be unforeseeable, outside the control of the parties to the contract and unavoidable.

A force majeure clause is an exception to the business requirement that contracts must be honored. Clauses are intended to lessen the impact of these events including business interruption and supply chain disruption. To help assure contract compliance, parties must meet the difficult burden of proving that the event was unforeseeable to be excused from meeting their contracted responsibilities.

Evolution

The scope of natural events covered by these clauses has increased with scientific knowledge. These include solar flares, asteroids, and super volcanoes. Pandemics have been addressed in these clauses.

There are more human threats including cyber, nuclear, and biological warfare capabilities. Human activities have also played a role in what were considered strictly natural events such as climatic and seismic events. There is litigation on whether drilling and construction played a role in natural disasters that made contracts unworkable.

California contracts

A typical and standard force majeure contract clause governed under California law permits the parties to apportion the risks of force majeure events. These include acts of God, hurricanes, earthquakes, and other natural disasters. Other events outside the control of the parties involve epidemics, terrorism, government acts, embargoes, labor strikes and lockouts.