svenska
Force Majeure - how to approach "acts of God" in contracts
Covid and new conflicts between nations have made us aware of the risks and challenges to produce and deliver a broad range of things and services under the influence of such matters, as the international markets are interlinked in more ways than ever. So the question of what liabilities and what walk-away rights you have in case something outside of your control happens is highly relevant. In order to have a solid protection the issues should be adressed in the agreements prior to the events happening and effecting your legal relationships and obligations. Let’s take a look.
Force Majeure
What is force majeure
The expression refers to an "Act of God". This means events that we cannot reasonably foresee, and that we can not reasonably control. This is a global contractual concept, and most professional contracts include a clause effectively stating that in cases where a non-performance by one of the parties is due to certain types of events outside of that party’s control then the non-performance should not lead to any consequences for late delivery/contract breach that would otherwise apply in such a case of non-performance.
What to keep in mind in relation to force majure
The scope of a force majeure
One important point in relation to force majeure clauses is that, as they are typically cocntractual, they can have different defintions and designs. The core concept is typically the same, but the scope can accordingly vary. The disputes as regards whether Covid was a force majeure event for various parties across the globe (from car production to sport events) show how important the closer defintion is, as to know what party that will be the party carrying the risk and hence becoming the primary "losing" party in the default event. So if you have any specific risk exposures in relation to your obligations that could relate to events outside of your control, consider if you have a force majeure that is broad enough and, on the flip side, if your counter party has a force majoure clause that is too broad and generous.
Furthermore, a force majeure clause will as a rule never be explicit and exact. It will instead be a general description listing a number of type events and situations that constitute a force majeure, and the clause typically ends with a reference to "other similar events outside of the parites control". This means that the applicable area for a force majeure will be subject to demarcation issues that you need to be aware of – and you should make a risk assessment also in this regard in relation to your specific business model (even if it may feel hard to imagine events that per definition are "acts of God" that you could not control or reasonably plan for).
The consequenses on your other committments
The next important aspect to consider is if the force majeure clause fits into your chain of agreements overall. For instance, if you are in the business of selling cars and (i) the manufacturer has a broad force majeure towards you - meaning that the manufacturer will not be liable or need to compensate you in any way if the cars are delayed due to e.g. a boat transports being delayed because of a storm – but (ii) you have no matching force majeure protection vis-à-vis your end customers waiting for their cars, on the contrary you have a strict responsibility in cases where the cars are delayed save for events relating to war or terrorist attacks.
So, make sure to review your contracts and ensure that you do not have a risk exposure similar to the scenario outlined above – and instead ensure that you are covered so that your obligations do not go beyond those that your suppliers, sub-contractors, and other relevant contracting parties have towards you.
Insurance
Also consider what insurances you can get in relation to force majeure and if they are warranted. Also consider what insurances you can demand that your counterparties hold that will provide them a way to compensate you in force majeure situations.
Action obligations/damage control
When a force majeure event happens it is often key to ensure both clear communication and swift damage control. So review the obligations to communicate, seek other ways to perform, and take other reasonable actions in order to prevent your counterpart from simply sitting with their arms crossed saying “not our problem” as soon as they invoke a force majeure event. A practical example could be that they must e.g. maintain a minimum reserve of some components, or seek to outsource production to another factory. So review the options depending on how important the counterparty’s role is for your business is. And in cases where you are the party that may benefit from the force majeure, make sure that the structure and the actions you may need to take are reasonable and functional for you without costing too much.
Timelines
The time when you may invoke a force majeure clause can be shorter or longer. Should there be an adjustment time after that is reasonable, that is under your control or that your counterparty may find too short or too long? E.g. if there is a natural disaster that happens during a day or two but that leaves destruction behind it – how long should non-performance then be acceptable for the party afflicted by the natural disaster? When should that party be obliged to deliver again, or should you or the other party have a right to walk away from the agreement if the force majeure non-performance goes on for longer than a stipulated timeframe?
Conclusion
The conclusion is that force majeure is often a central part of the agreement - not only a standard clause in the end. It should be reviewed and analysed as the consequenses of a force majeure clause being applicable (or not) may often be the difference between a business surviving or not, or at least if it prospers or not. So do look at the issues pinpointed above in your agreements, and consider if you need to make adjustments. One thing we know from the last years is that we never know when a force majeure will happen and who it will impact. So be ready.
Stockholm 2024-01-16
Author, Katarina Strandberg
Force Majeure
What is force majeure
The expression refers to an "Act of God". This means events that we cannot reasonably foresee, and that we can not reasonably control. This is a global contractual concept, and most professional contracts include a clause effectively stating that in cases where a non-performance by one of the parties is due to certain types of events outside of that party’s control then the non-performance should not lead to any consequences for late delivery/contract breach that would otherwise apply in such a case of non-performance.
What to keep in mind in relation to force majure
The scope of a force majeure
One important point in relation to force majeure clauses is that, as they are typically cocntractual, they can have different defintions and designs. The core concept is typically the same, but the scope can accordingly vary. The disputes as regards whether Covid was a force majeure event for various parties across the globe (from car production to sport events) show how important the closer defintion is, as to know what party that will be the party carrying the risk and hence becoming the primary "losing" party in the default event. So if you have any specific risk exposures in relation to your obligations that could relate to events outside of your control, consider if you have a force majeure that is broad enough and, on the flip side, if your counter party has a force majoure clause that is too broad and generous.
Furthermore, a force majeure clause will as a rule never be explicit and exact. It will instead be a general description listing a number of type events and situations that constitute a force majeure, and the clause typically ends with a reference to "other similar events outside of the parites control". This means that the applicable area for a force majeure will be subject to demarcation issues that you need to be aware of – and you should make a risk assessment also in this regard in relation to your specific business model (even if it may feel hard to imagine events that per definition are "acts of God" that you could not control or reasonably plan for).
The consequenses on your other committments
The next important aspect to consider is if the force majeure clause fits into your chain of agreements overall. For instance, if you are in the business of selling cars and (i) the manufacturer has a broad force majeure towards you - meaning that the manufacturer will not be liable or need to compensate you in any way if the cars are delayed due to e.g. a boat transports being delayed because of a storm – but (ii) you have no matching force majeure protection vis-à-vis your end customers waiting for their cars, on the contrary you have a strict responsibility in cases where the cars are delayed save for events relating to war or terrorist attacks.
So, make sure to review your contracts and ensure that you do not have a risk exposure similar to the scenario outlined above – and instead ensure that you are covered so that your obligations do not go beyond those that your suppliers, sub-contractors, and other relevant contracting parties have towards you.
Insurance
Also consider what insurances you can get in relation to force majeure and if they are warranted. Also consider what insurances you can demand that your counterparties hold that will provide them a way to compensate you in force majeure situations.
Action obligations/damage control
When a force majeure event happens it is often key to ensure both clear communication and swift damage control. So review the obligations to communicate, seek other ways to perform, and take other reasonable actions in order to prevent your counterpart from simply sitting with their arms crossed saying “not our problem” as soon as they invoke a force majeure event. A practical example could be that they must e.g. maintain a minimum reserve of some components, or seek to outsource production to another factory. So review the options depending on how important the counterparty’s role is for your business is. And in cases where you are the party that may benefit from the force majeure, make sure that the structure and the actions you may need to take are reasonable and functional for you without costing too much.
Timelines
The time when you may invoke a force majeure clause can be shorter or longer. Should there be an adjustment time after that is reasonable, that is under your control or that your counterparty may find too short or too long? E.g. if there is a natural disaster that happens during a day or two but that leaves destruction behind it – how long should non-performance then be acceptable for the party afflicted by the natural disaster? When should that party be obliged to deliver again, or should you or the other party have a right to walk away from the agreement if the force majeure non-performance goes on for longer than a stipulated timeframe?
Conclusion
The conclusion is that force majeure is often a central part of the agreement - not only a standard clause in the end. It should be reviewed and analysed as the consequenses of a force majeure clause being applicable (or not) may often be the difference between a business surviving or not, or at least if it prospers or not. So do look at the issues pinpointed above in your agreements, and consider if you need to make adjustments. One thing we know from the last years is that we never know when a force majeure will happen and who it will impact. So be ready.
Stockholm 2024-01-16
Author, Katarina Strandberg