“Force Majeure” – What Happens When the Worst Happens?


Force Majeure
Force Majeure

 

When Hurricane Sandy hit the East Coast recently, the resulting power outages, gasoline shortages, flooding, wind damage, and other devastation made it difficult or impossible for businesses in the hurricane’s path to function normally.  In fact, one of my clients was featured for its efforts to keep its data center in lower Manhattan running despite loss of power.  When the client called me to discuss contingency plans under its lease, the first provision I looked at was “Force Majeure”.

Force majeure can come into play in a transactional instance, where it is a fairly standard provision of many contracts, like in my client’s lease, or in a litigation instance, where it can be an affirmative defense to a breach of contract claim.

Under Tennessee law, the affirmative defense of force majeure is known as “an Act of God” and “any misadventure or casualty is said to be caused by the ‘Act of God’ when it happens by the direct, immediate, and exclusive operation of the forces of nature, uncontrolled or uninfluenced by the power of man and without human intervention . . . [and] must be of such character that it could not have been prevented or escaped from by any amount of foresight or prudence, or by the aid of any appliances which the situation of the party might reasonably require him to use.” Butts v. City of S. Fulton, 565 S.W.2d 879, 882 (Tenn. Ct. App. 1977). Notably, events that are not acts of God, such as the passage or implementation of a new government regulation that may affect a party’s ability to comply with its contract are, nevertheless, not within the umbrella of the force majeure affirmative defense. Am. Book Co. v. Consol. Group of Cos., Inc., NO. 3:09-CV-112, 2011 WL 11969, *2 (E.D. Tenn. Jan. 4, 2011).

However, when drafting a contract, the parties are free to define force majeure in the manner in which they want and include circumstances that uniquely suit the situation of their contract.  Some force majeure clauses specify the types of circumstances that trigger the right not to perform, but others are more general in nature.

One example of a force majeure clause from a contract at issue in a recent Tennessee Court of Appeals case, Robert J. Young Co. v. Nashville Hockey Club Ltd. P’ship, No. M2006-2511-COA-R3-CV, 2008 WL 820488, *1 (Mar. 26, 2008), is below:

“11. FORCE MAJEURE.  In the event compliance with any of the parties’ obligations under this Agreement is impractical or impossible due to any emergency, including, but not limited to, player strikes, management lockouts, labor disputes, embargoes, flood, earthquake, storm, lightning, fire, epidemic, acts of God, war, national emergency, civil disturbance or disobedience, riot sabotage, terrorism, threats of sabotage or terrorism, restraint by court order or order of public authority, failure of machinery or equipment or any other occurrence beyond the parties’ reasonable control (each such occurrence being an “Event of Force Majeure”), then the time for performance of such obligations shall be extended for a period equal to the duration of the event of Force Majeure.”

This clause was contained in a contract dealing with Robert J. Young Company’s sponsorship agreement with the Nashville Hockey Club regarding Robert J. Young Company’s season tickets to Nashville Predator hockey games and advertising on two dasher-board panels. In that case, the force majeure clause came into effect because, much like the 2012 hockey season, the Nashville Predators’ 2004-2005 season was delayed and eventually canceled because of work stoppage arising from the expiration of the collective bargaining agreement between the players and the owners.

As stated above, unlike force majeure as an affirmative defense that is limited to “Acts of God,” parties may draft force majeure contract clauses to suit the parties’ unique needs. The clause above provides a good example of this because it specifically includes “player strikes, management lockouts, [and] labor disputes.”  Those types of inclusions are appropriate under the circumstances because of the nature of the professional hockey business; however, they would not be appropriate in many other types of contracts containing force majeure clauses.  Therefore, it is very important when drafting force majeure provisions not to just include all of the template language related to “Acts of God.” Instead, you must consider what circumstances outside of your control might affect your ability to perform the contract and make sure that your force majeure clause prevents you from being liable for breach of contract should those circumstances occur.

Further, when drafting force majeure clauses, it is important to consider whether to include requirements that a party perform certain actions to take advantage of the clause.  One common example is a written notice requirement.  Another such requirement might be a requirement to mitigate damages caused by non-performance.  If you are not the party who is likely to take advantage of a force majeure clause, these requirements would be something that you would likely want to negotiate to include.  For example, if a contractor is constructing an office building for an investor, then the investor would likely want to include notice and mitigation requirements for the contractor to take advantage of the force majeure clause because it is the contractor, not the investor, who is most likely to take advantage of the force majeure clause.

Force majeure clauses are easy to overlook in contracts because it is easy to assume that “Acts of God” or other circumstances outside of one’s control are unlikely to occur. Although that is generally true, that is no excuse not to be prepared in the event that something does happen. People and businesses who have been affected by major events like Hurricane Sandy, professional hockey strikes, and the flood in Nashville in 2010 who had effective force majeure clauses in their applicable contracts were probably somewhat more at ease during those stressful times than they would have been otherwise.

A few practice pointers to remember:

• Even if you do not have a written contract or your contract does not contain a force majeure clause, you can still plead force majeure as an affirmative defense in response to a breach of contract action if your non-performance was caused by an “Act of God.”

• Don’t use standard force majeure clauses in your contracts without carefully considering whether the standard clause covers all of the circumstances outside of your control under which you would want to be relieved from liability for breach of contract. Although you can have a general force majeure clause, it is typically best to include specific circumstances that would trigger the force majeure clause.

• Consider including circumstances outside of your control that are not normally part of force majeure clauses, if appropriate, such as changing economic factors. Force majeure clauses benefit the party who is most likely to breach the contract because of a factor outside of his/her/its control. If including something like changing economic factors would benefit you, then, it is worth negotiating.

• Consider whether to include requirements that must be met for a party to take advantage of the force majeure clause, such as mitigation or notice requirements.