The future of the force majeure clause: 4 things companies will now consider while drafting and negotiating contracts​
While the COVID-19 Pandemic is now the most notable global force majeure event in modern history, it certainly was not the first.
Claire Williams // April 6, 2020
Up until only a few months ago, the force majeure clause was more often-than-not just a legal formality while drafting contracts. Much of the general public had never even heard of the term (Merriam-Webster reported over a 100% increase in searches for a force majeure definition over the past several weeks) and many executives had, at best, a loose understanding of force majeure, but no clear reaction or recovery plan from such an event.
While the COVID-19 Pandemic is now the most notable global force majeure event in modern history, it certainly was not the first. In this post, we'll take a look back at how and when the first force majeure clause came to be, its evolution over the years, as well as some of our predictions on how drafting and negotiating this clause will change post-COVID-19.
The terminology
Force majeure is a French phrase that translates to 'superior force.' Force majeure is defined by Merriam-Webster as an event or effect that cannot be reasonably anticipated or controlled. The legal purpose of a force majeure clause is "to excuse one or both parties from not performing their contractual obligations that become impossible or impractical due to an event that the parties could not anticipate or control." Examples of this include natural disasters, pandemics and epidemics, wars and terrorism, acts of God, supply shortages, and others.
The first force majeure
The first instance of invoking force majeure happened in France in the late 1800s when a French court heard an actor's claim that a typhoid outbreak in a city should excuse him from performing even though the theatre remained open. Soon European countries like England, Germany, the Netherlands (which had been extremely contractually uncompromising) began more widely adopting this clause, however it was still uncommon that unforeseen events could be a legitimate excuse not to fulfill an agreement. This began to change however, when exceptions were being made for 'Acts of God', which in the early days included things like the sinking of a ship, a natural disaster, a plague, or other acts that weren't man-made.
At the cusp of WWI, Western countries specifically were not prepared for the economic turbulence that came with a war of that scale, which left many contracts frustrated or at a standstill. While force majeure had been invoked in the past for circumstances like natural disasters, ships sinking, cargo being lost, etc., WWI changed the way that companies and countries prepared for business during war time. It expanded to include events that were previously overlooked when it came to this clause, such as war or another man-made event but that was not able to be influenced or controlled by the parties of an agreement.
Force majeure today and tomorrow
More recent examples of force majeure events include September 11th, the SARS outbreak, Hurricane Katrina, and the 2011 nuclear factory explosion in Japan. These events are recognized as some milestone examples of how the force majeure clause has continued to evolve with society. After these events, we saw force majeure clauses more thoroughly include details around terrorist attacks, pandemics and epidemics, man-made disasters, supply shortages, and more. Recently, there have been concerns about how climate change and the growing technological advancement will shape force majeure clauses.
Upcoming events Brexit and LIBOR have caused many companies to start wondering how they are prepared for the transitions that will be occurring in the near future, and if they are covered. COVID-19 has changed the way the international market looks at events like viruses and global pandemics. The force majeure clause is continuing to evolve to be able to cover events that have an unknown outcome. With the evolution of force majeure, many companies are taking a second look at how to write these clauses in the future to ensure they are prepared.
Here are some ways we're predicting companies will change how they both draft and negotiate their force majeure clauses post-pandemic:
Cleaning up problematic language – Force majeure language ranges from broad ('Act of God') to extremely specific in detail, creating a major gray area in definition (which is where litigation often ignites). We still start to see companies clean up the specific force majeure events outlined in their contracts (especially when defining 'pandemic' and 'epidemic' events) to eliminate litigation triggers or problematic language.
New regulations on the horizon – Currently, there are different force majeure laws and classifications depending on where you are in the world. With global issues such as Brexit or COVID-19, the world will be forced to create a universal understanding of what classifies a global force majeure event.
Careful considerations for protected parties – Companies will now need to negotiate protection for not only themselves, but their subsidiaries, employees, assets, etc. Governments will need to create and uphold new policies that would apply to effected organizations and/or groups of citizens throughout force majeure events.
Finding fast and flexible solutions – While having a force majeure clause may excuse parties from contractual obligations, this doesn't always mean that it can provide an answer for the problem. Following COVID-19, Brexit, LIBOR, and others, companies will prioritize crisis and recovery plans related to the clause itself, so they don't get caught flat-footed again.
As society and technology continue to evolve, we can expect the force majeure clause to do the same. While we reflect on the history of the clause itself, which is unfortunately tied to some of the most challenging and trying times in history, we remember that society has always triumphed.
Over the next several months, businesses will continue to shift from a reactionary phase to one of recovery. The first step to making the actual first step in organizational recovery is to understand the risks and obligations within your current agreements. Heretik and all of our partners are ready to help any and every organization take that first step when they are ready to do so.
CLAIRE WILLIAMS
Claire is a Marketing Coordinator at Heretik. She recently graduated from Miami University Ohio with a double major in Journalism and Mandarin Chinese. Prior to Heretik, Claire worked at Amdur Productions and for Miami University College of Arts and Science.​