force majeure: a time bomb

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Force Majeure Clause in ContractsA time bomb?

By F. Oboni & C. Oboni

Riskope

http://www.riskope.com/

http://foboni.wordpress.com/


Force Majeure clauses are now well established as “boilerplate” clauses, essential to the mechanics of commercial contracts.

FM literal meaning is “superior force”, denoting an influence that is not capable of being controlled.

The Messina earthquake and tsunami took as many as 200,000

lives on December 28, 1908 in Sicily and Calabria.




FM has been passed down from the common law courts of England, and hasn’t really changed significantly in a very long time despite the radical changes in the world.

The Elie, Manitoba Tornado of June 22, 2007 was the first tornado in Canadian history to cause F5 damage.(261-318 mph)




For example, delays due to breakdowns in machinery did qualify as a FM events, while bad weather, football matches and a funeral did not.

Geneva January 2005 freak ice storm...a “first in records” event




1999 Salt Lake City First known casualty in a Utah Tornado

Some homeowners insurance policy state that wind shear is an act of nature but a tornado is an Act of God and is not covered.

How are climate changes related events going to be considered?




Modern FM include a “non-exhaustive” list ofevents so as to ensure that anycircumstances not mentioned can be arguedto be included. Importantly, the ejusdemgeneris rule does not apply to FM i.e.

specifying events does not cut down themeaning of any general words that follow.




Clearly whether events such as riots and strikes come within the definition is debatable...what about “new” risks such as IW, MP etc.?

Although paradoxical it seems that “future risks” might be more easily dealt than “usual” risks.




Perhaps the Supreme Court pornography explanation: “it is difficult to define, but I know it when I see it” should be used for FM!

Despite the generalized use of FM clauses, Courts have struggled to define what FM means as statements leave major room for interpretation.




The party intending to rely on FM must establish that the event in question was beyond their control;

and that there were no further steps the party could have taken to avoid or mitigate the consequences.

FM allows a party to terminate a contract under extreme circumstances, usually when performance becomes impossible or impracticable.




The more difficult cases arise when one party to the contract claims performance is impossible, while the other maintains that performance is possible, but just at a greater expense to the other party.

Attempts have been made to increase FM scope for commercial advantage.




Donald Trump has argued that the current financial crisis qualifies as a FM event. This would excuse him making payments on a real estate loan.

Trump, Donald et al. –v- Deutsche Bank Trust et al., New York Supreme Court, Queens, 026841/2008.

The case raises interesting questions over the scope of FM during periods of national and/or international crises of various origin.




Economists and financial experts seem indeed to dare say that a phenomenon that happens (with a range of magnitudes)seventeeen times in two hundred years, andhappened with very significant magnitude seventy years ago and again in 2008-2009 is...

.... unforeseeable…??!!

they have even invented a nice wording for it….a black swan…!!




What many Industries seem to adopt as a rule:

a Maximum Credible Event has a probability between 1/100,000 and 1/1,000,000.

Anything below those values would be “not credible”, thus an Act of God.




Let's Consider Climate Changes Related Events as an Example




Force Majeure a contractual Time bomb!

What would happen if more than 25 occurrences in 48 years got declared “normal” ?




With hurricane activity in the Gulf Coast athigher than historical levels in 10 of the past 12 years, and with forecasters able to predicthurricanes several days in advance, theposition that a hurricane in the region is anunforeseen circumstance may bechallenged.




Ý#a#c#k#a#g#e#_#s#t#r#e#a#m###But shouldn't we define what type of Hurricane we are talking about?

By defining, for example, limiting values of the Hurricanes and their limiting frequency, we would have a way stronger FM clause.




How to perform that task ?

Proper hazards identification and scenarios definition

Quantification of limiting valuesNegotiations based on risk tolerability of

both partiesWin-win B2B strategies




Optimization will take the form of:

-more detailed explanation of terms, -definition of threshold values (quantified), -definition of mitigative levels to be considered “common practices” or “best practices”, -definition of negligence, -limiting value of Force Majeure.




The optimization of Force Majeure formulation constitutes an important proactive mitigative

measure with very large potential ROI (Return On Investment).

It will reduce discussions and litigation in the aftermath of an uncommon event, which is equivalent to “sparing time”, or reduce the

impact of the mishap.




Contact Riskope to discuss how we can support you in optimizing your next contract's

Force Majeure clause.

[email protected]



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