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What is a Force Majeure Clause?

A force majeure clause is a standard contract clause that exists to protect businesses from situations beyond their control. The term “force majeure” defines events that one party considers beyond their control. The event is often outside their ability to plan for or predict, such as an unexpected natural disaster.

A natural disaster typically covers any event where property damage results from fire, flood, earthquake, hurricane or other weather-related events.

For example, a company is unable to deliver products on time because of an earthquake or other natural disaster. The company might not be at fault for failing to meet its contractual obligations. However, they need to have a valid force majeure clause in place.

An act of God clause can allow a party to suspend or end the contract.

Parties may not be obligated to fulfil a contract when a force majeure event occurs. However, this does depend on the wording of the clause.

contract lawyer with experience in force majeure clauses

A force majeure clause has a number of benefits for both parties

A force majeure clause has a number of benefits for both parties. First, it protects businesses from loss of money and time.

It also ensures that the parties can’t be sued for not fulfilling the contract as originally agreed upon.

Finally, it helps businesses avoid penalties and other legal issues that may result from non-performance. For example, because of unexpected circumstances beyond their control (such as natural disasters).

Several steps can help you create the best possible force majeure clause

A force majeure clause is an agreement that excuses a party from responsibility or financial obligation in certain events. These events are considered as “force majeure”. Creating this clause carefully and thoroughly is crucial in order for it to be legally binding. The language used should be clear and explain what qualifies as a force majeure event.

Here are some steps that can help you create a good one:

Define your terms

What do you mean by force majeure? Do you plan to include only certain events (i.e., natural disasters such as earthquakes), or everything from acts of God to acts of war? Also, define which party has the burden of proof in cases where an event is disputed.

Make sure it’s legally binding

The agreement should be signed by everyone who is entering into the contract. These documents should also contain language stating that these documents take precedence over any previous versions.

Example clause

Either party may suspend or terminate this agreement if a Force Majeure Event occurs and:

  1. continues for a minimum of one month; and
  2. the party affected by the Force Majeure Event cannot avoid the consequences by taking reasonable steps.

Force Majeure Event means war, an act of terrorism, pandemics and epidemics, severe weather events, natural disasters and acts of God. It does not include industrial action or a failure to comply with this agreement.

severe storm event

The benefit of a force majeure clause

Overall, a force majeure clause can protect your business if an out-of-control event disrupts your operations.

If you enter into a contract with a supplier, you may want rights if they can’t supply because of a force majeure event. The supplier can also use this clause as protection if there is an event that is outside of their control.

There are many other advantages to having these clauses included in contracts. For example:

  • it helps ensure performance on both sides so that neither party gets penalised
  • it reduces liability for non-performance
  • it helps prevent litigation between parties

What should a force majeure clause cover?

Before you agree to an act of God clause, it’s important to understand how it works.

These clauses typically cover the following events:

  • acts of terrorism
  • natural disasters, including severe storms
  • war or civil or military disturbance
  • pandemics (but only sometimes)

However, you may wish to extend the coverage. For example, if you rely on raw materials to supply products, the clause may cover the availability of raw materials. This is because, without the raw materials, you cannot supply the goods. Your sale of goods contract should cover this.

If you’re not sure about the events the clause covers or how to use it, you can ask.

A good contract lawyer can explain the basics of a force majeure clause in layman’s terms. This will enable you to make an informed decision. You can decide on whether or not your business should include one in its contracts moving forward.

What a force majeure clause shouldn’t cover

Assume your business is in a flood zone and knows that it’s at risk for severe flooding on a regular basis. Your business doesn’t take steps to protect its employees or property during these times (such as putting up sandbags). In this case, the resulting damage may not qualify under force majeure protection.

Again, this depends on the wording of the clause. However, it will typically require that even if a party had taken reasonable steps, they could not have avoided the issue.

Governmental regulations, company misconduct, and changes in financial conditions don’t qualify you for force majeure protection.

Like this article? Check out:

How to Terminate a Contract

A Commercial Contract Lawyer’s Guide To Unenforceable Contract Terms

Top Five Mistakes To Avoid When Drafting Commercial Contracts In Australia

If Your Business Exports Services – Consider This

About the Author

Farrah Motley
Director of Prosper Law. Farrah founded Prosper online law firm in 2021. She wanted to create a better way of doing legal work and a better experience for customers of legal services.

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