Force Majeure

Definition

Force Majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond their control, such as a war, strike, riot, crime, or natural disasters (“Acts of God”), prevents one or both of them from fulfilling their obligations under the contract. In essence, it is a legal term for “unforeseeable circumstances that prevent someone from fulfilling a contract.” The event must be external, unforeseeable, and unavoidable to qualify as Force Majeure.

Phonetic

The phonetics of the keyword “Force Majeure” is: /fɔːrs mæˈʒɜr/

Key Takeaways

1. Legal Explanation: Force Majeure is a legal term used in contracts to describe unforeseen and uncontrollable events (like natural disasters, wars, or pandemics) that prevent one or both parties from fulfilling their obligations under the contract. This concept allows for a suspension or a discharge of obligations during these events.
2. Application: The application of a force majeure clause in a contract can vary depending on the jurisdiction, the nature of the unanticipated event, and the specific language used in the contract. It’s not automatically applied, but must be invoked by one of the contracting parties.
3. Implication: The implications of a force majeure clause can be significant for businesses. Invoking it may absolve a company from honoring a contract during the force majeure event. However, once the event has passed, the obligations under the contract generally resume unless the contract is terminated.

Importance

Force Majeure is a crucial term in business and finance because it provides a form of protection for parties engaged in a contract under unforeseen and extraordinary circumstances. It denotes a clause that is included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict participants from fulfilling obligations. This essentially means that if there are acts of nature or extraordinary events such as wars, strikes, riots, or pandemics, the party that cannot deliver on the contractual obligations due to these unforeseen circumstances can potentially invoke the force majeure clause to avoid legal and financial repercussions. Its importance greatly lies in its capacity to mitigate risks associated with contractual agreements.

Explanation

One of the key purposes of the term “force majeure” in business and finance is to address unforeseeable circumstances that prevent someone from fulfilling a contract. This legal concept is essentially a safety valve, reducing liability for both parties involved when extraordinary events or circumstances beyond their control occur that obstruct contract fulfillment. These events, often referred to as acts of God, could include natural disasters or occurrences like wars, strikes, riots, or even dramatic governmental interventions. The use of a force majeure clause provides a way to suspend, interrupt, or end a contract due to the impact of these extraordinary events. It’s a measure to protect contracting parties from outcomes that could not reasonably be anticipated or controlled. It’s important to note that a force majeure event doesn’t release the parties from the contract; rather, it temporarily suspends or modifies their obligations during the duration of the event. Used appropriately, a force majeure clause ensures that contractual ramifications of such unexpected events are managed in a fair and equitable manner.

Examples

1. During the COVID-19 Pandemic: Many businesses around the world invoked Force Majeure clauses in 2020 due to the COVID-19 pandemic. The inability to fulfill contractual obligations due to mandated closures, disrupted supply chains, or decreased demand for certain services can all be considered examples of force majeure.2. The 2011 Fukushima Earthquake and Tsunami: The earthquake and subsequent tsunami in Fukushima, Japan, in 2011 severely disrupted industries globally. Many companies had to invoke force majeure clauses in their contracts due to disruptions in the supply chain, especially within the automotive and electronics industries.3. Hurricane Katrina: When Hurricane Katrina hit the United States in 2005, numerous businesses were unable to meet their contractual obligations due to the damage caused by the storm, the subsequent flooding, and the mass evacuation. The hurricane, being an act of nature, falls under the definition of Force Majeure, enabling businesses to invoke this clause in their contracts.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Contractual Obligations
• Act of God
• Impossibility of Performance
• Risk Management
• Legal Excuse

Sources for More Information

• Investopedia
• Legal Information Institute – Cornell Law School
• Corporate Finance Institute
• Lexico by Oxford