Force Majeure in business contracts

What is Force Majeure?

When businesses enter into contracts, they are expected to fulfil their obligations. If a seller is unable to deliver in accordance with an agreement, the buyer can typically invoke remedies for breach of contract against the seller. This may lead to the seller being held liable for damages in cases of delays or non-delivery of goods, or the buyer may be held liable if they are unable to receive and pay for the goods.

However, extraordinary circumstances beyond the control of both parties may arise, making it impossible to fulfil the agreement. This is where “force majeure” comes into play. Force majeure is a contractual clause invoked in the event of unforeseen events that neither party could have anticipated or prevented, even with reasonable diligence.

What does it mean?

Force majeure is a contractual provision accounting for unforeseen and extraordinary circumstances beyond the control of the parties. It is often a central topic of negotiation when drafting commercial contracts. The purpose of this clause is to protect both creditor and debtor (seller and buyer) from liability for failing to fulfil their obligations when situations arise that could not have been foreseen or prevented, even with reasonable care.

The Importance of a Force Majeure Clause

A force majeure clause is important as it establishes which extraordinary events will entitle the contracting parties to invoke force majeure and how such situations should be managed. By including this clause in a contract, the parties can clearly define the specific events that will exempt them from liability if they are prevented from fulfilling the contract.

Typical examples of events often covered under the concept of force majeure include:

• Natural disasters such as earthquakes, floods, or fires
• Extreme weather conditions
• War
• Terrorism
• Strikes
• Pandemics
• Government prohibitions

These are situations that one or both parties could not have anticipated or prevented, even by taking reasonable precautions.

Why Draft a Force Majeure Clause?

Since legislation only partially addresses force majeure situations, it is often necessary for parties in a commercial contract to draft a precise agreement. This allows them to tailor a solution that perfectly fits the unique business context and risks of the contract.

It is worth noting, however, that drafting clauses broad enough to cover all possible situations can be challenging. Contractual scopes vary, and each agreement seeks to address specific risks relevant to the parties’ transactions.

In the business world, the force majeure clause plays a vital role in protecting parties from unforeseen events that may prevent the fulfilment of the agreement. It provides a framework for dealing with extraordinary circumstances and ensures that parties are not unfairly held liable for matters beyond their control. By specifying the terms in contracts, businesses can negotiate customised solutions that best suit their particular business needs and risks.