Translated from French, the term "force majeure" means greater force. It's an odd term for a contract. While it's often presented as boilerplate, there are subtleties to know. Read on to learn what a force majeure clause in a contract really means within the context of business contracts and the four most common elements that make up the force majeure clause.
What Does 'Force Majeure' Mean in a Contract?
Broadly speaking, force majeure refers to events that are totally unforeseeable and completely unavoidable. Consider a tornado. While tornadoes tend to happen in certain geographic areas, there is an unpredictable element to a tornado; no one knows when it will happen. When it occurs, the damage it causes is unavoidable — there is no action to take to reduce the damage to a structure that is in a tornado’s path.
To count as a force majeure, an event also needs to be external to the contract signers; a personnel transition thus wouldn't count because the conflict is internal to the business context in this example.
The force majeure clause provides an out for a business that fails to perform contract terms in the event of circumstances that were unforeseeable and unavoidable (such as the tornado example mentioned above).
In addition to a tornado, the following may qualify as force majeure events:
- War or riot
- Natural disaster (such as earthquake, typhoon, hurricane or flood)
- Labour strike
- Explosion, fire or lightning strike
- Governmental action that prohibits fulfilment of the contract
- Viral outbreak or pandemic
These clauses are not intended to excuse failure to deliver as a result of internal circumstances, such as personnel, operations or business systems. If a business failed to properly plan a time frame to deliver a project to a client, or a supplier went out of business, it cannot claim force majeure for its oversight. Nor can the force majeure clause be used to excuse delays caused by:
- Pricing fluctuations within the supply chain
- Economic volatility
- Failure to properly anticipate circumstances
Now that you know what the force majeure clause in a contract means, you might start to recognise it everywhere. This clause is found in all sorts of business contracts, including:
- Leases
- Supply contracts
- Service agreements
- Merger and acquisition agreements
Common Force Majeure Clauses to Know
- Definition of force majeure: the force majeure clause is generally tailored to reflect actual threats to business, which can be highly geographic in nature. What counts as unforeseeable in one area may be thought of as foreseeable in another.
Consider forest fires in California — those happen annually so may be reasonably anticipated. On the other hand, a forest fire in Vermont could be a random event that's unlikely to be repeated. Likewise, a flood in Miami would be reasonably anticipated and may not trigger the force majeure clause. For this reason, there is always a detailed list of what constitutes (and does not constitute) force majeure.
- List of exceptions: given that this clause typically is exercised when it becomes impossible, not merely impractical, to satisfy a contract, this section outlines the terms that must be met for a contract to be considered breached. For example, if costs increase or there is a delay in the supply chain outside the business's control, the contract can still be fulfilled — just not on time or on budget. These would be exceptions to force majeure.
- Conditions to trigger: this clause outlines any specifications that must be met to trigger force majeure. There is typically a small window of time during which one party can give notice triggering this clause. There's usually an amount of detail that must be provided regarding the nature of the event (such as a tornado) and anticipated time frame of any business interruptions. In some cases, there are provisions regarding partial fulfilment of the contract.
- Remedies upon force majeure: assuming that a defined event takes place and force majeure is triggered, this clause outlines the remedies that are available to both parties. A typical clause will outline ways to terminate the contract or excuse payment, since the contract was not fulfilled. This helps all parties understand.
Force Majeure Analysis for Contracts
Businesses need to understand the force majeure clause — including how it could impact a business deal, such as a merger. Increasingly, businesses are leveraging artificial intelligence (AI) to quickly review contracts to understand critical points without diving deep into hundreds of pages of documentation.
DFIN offers powerful contract analytics software that uses AI technology to analyse a batch of contracts searching for force majeure clauses or the equivalent. The software can parse these clauses to quickly extract the important details. This enables you to understand the implications at a higher level without needing to read all the fine print. Using AI for contract review reduces the time and expense of due diligence while preventing oversight. Users typically see a reduction in time of 50% when leveraging AI for automated contract review. To see the difference for yourself, try it.
