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Force Majeure in commercial contracts—July/August print edition

Resist the temptation to treat these provisions as boilerplate


September 10, 2013
by Doug Sanders and Bill Woodhead

Recent flash floods in Alberta and Ontario demonstrate the importance of ensuring that commercial contracts include provisions clearly allocating risk for events of force majeure. These provisions should not be overlooked as they can, and do, vary significantly from contract to contract.

There is no standard force majeure clause. The scope of each force majeure provision is dependent upon the specific terms of the applicable contract. In some contracts, the force majeure provisions may even be included within another contractual concept such as “delay” or “excusable events”.

Despite the lack of a standardized force majeure clause, contractual force majeure provisions can provide relief for events which are considered to be outside the reasonable control of the contracting parties, such as “acts of God” and for which insurance is not typically available at a reasonable cost. Force majeure provisions are drafted to either provide a specific list of events or a broader inclusive description covering all events beyond the reasonable control of the parties.

When reviewing a contract, it’s important to resist the temptation to treat the force majeure provisions as boilerplate language or to assume that the types of circumstances that would trigger a force majeure claim are so remote that they will simply never happen. The Alberta and Ontario floods demonstrate that unforeseen events do occur, and when they do, having carefully thought-out provisions that are project and industry specific will help to ensure a commercially reasonable outcome. A well-drafted force majeure provision will usually identify:

  • triggering events;
  • what impact must those events have on the party who invokes the clause;
  • the impact to the contractual obligation of the parties; and
  • relevant notice obligations.

The identification of the triggering events should be carefully considered within the context of the project or industry to which the contract relates. The triggering events should be tailored to the types of situations that may be encountered, and which party is to accept the risk. Some triggers are more contentious than others, for example, floods, earthquakes, fires, acts of war, terrorism and sabotage (for which the claiming party is not responsible) are often included, while other circumstances, such as labour disputes, strikes and lockouts, may or may not be included as events of force majeure.

Generally, in order for a party to be entitled to claim force majeure relief, they must show that the occurrence of a defined triggering event impacted their ability to perform obligations. It’s important to consider the scope of the required impact, as it can vary from a simple requirement that performance be impacted by the triggering event to a requirement that the occurrence of the triggering event render performance of the entire contract impossible, or somewhere in between.

Although successfully invoking force majeure will typically entitle the impacted party to some form of relief, the scope and nature of that relief varies from contract to contract. While contracts will often provide for schedule relief to offset the delay caused by the party’s inability to perform, an impacted contractor or supplier may or may not be entitled to recover costs, such as stand-by charges for idled equipment and labour, incurred during the course of the force majeure event. Prolonged events of force majeure may not be contemplated in the contract and parties may not be entitled to termination if an event of force majeure continues for a significant time period. It’s important to ensure that force majeure provisions identify what costs, if any, a contractor or supplier is entitled to and how long an event of force majeure must persist before giving either party a right of termination.

Force majeure provisions also often include notice requirements upon the occurrence of an event of force majeure. Notice provisions usually require the party intending to rely on the force majeure provision to give notice of the event within a specified period of time. If notice isn’t given within that time, relief may be forfeited. Where a contract specifies an exhaustive list of force majeure events, it’s important that the party claiming relief carefully reads the contract before sending notice to ensure the event falls within the enumerated list and it’s described accordingly in such notice.

When preparing or reviewing commercial contracts, the force majeure provisions shouldn’t be overlooked or underestimated. Force majeure is a key component of the overall allocation of contractual risk.

This column is provided for general information only and may not be relied upon as legal advice. Doug Sanders (left) is a partner in the Vancouver office of Borden Ladner Gervais LLP. Reach him at dsanders@blg.com.
Bill Woodhead (right) is an associate in the Vancouver office of Borden Ladner Gervais LLP. Reach him at bwoodhead@blg.com.