By Rajah Lehal
In days gone by, an act of God, strikes, horrible weather and the like could result in disruption of business to such an extent that a company would call upon a “force majeure” clause to halt their requirement to perform their contractual requirements. This is true for non-businesses too; growing up, torrential rain, “snow days”, and other freak accidents were always a great excuse to get out of going to school or doing some chore. Nowadays it’s getting harder to claim a “snow day”. For example, on Friday of last week the folks in my Clausehound office, along with the RBC bank branch, and the coffeeshop downstairs, faced a power outage. Although work continued for a while on laptop batteries, eventually the lack of internet forced everyone across the street to a nearby restaurant for beer and wifi. With services, software and files in the cloud storage system that we operate on at Clausehound, we had nearly a dozen staff members back in business in minutes.
Keeping in mind the importance of data security, business resumption is getting easier and easier to accomplish, and as a result, the invoking of a force majeure clause is less and less likely.
What is force majeure
Force majeure, latin for “superior force” is the legal concept that describes an incident that is completely outside of the control of the contracting parties. If the effects of this incident are so devastating that it renders the performance of the contract impossible, one or both of the parties may invoke the force majeure clause if the contract provides for one.
Take for example a simple transaction for cash consideration between two parties for the purchase of computers. Before the vendor can make delivery, the computer factory is destroyed by an earthquake, making delivery impossible. The vendor would likely invoke the force majeure clause to avoid non-performance damages to the purchaser.
Here are two examples of recent arguments on the topic of force majeure.
- In 2014, parties argued over the existence of a valid force majeure after the performing party’s generator failed. If this generator failure was deemed to be a valid force majeure, then a capacity payment of $40,000 would be paid to the receiving party by a third party and the performing party will not be required to pay for damages. If the generator failure was not deemed to be a valid force majeure, then the performing party would be liable for a penalty of $167,000. Although the dispute was submitted to arbitration, the case demonstrated the importance of a force majeure claim to the vitality of a performing party’s business.
- In a case related to room rentals, a forest fire near the location caused the defendant to change their planned use of rented rooms. The court sided with the plaintiff who had the rooms readily available and rejected the application of the force majeure clause, as the forest fire did not prevent them from performing this obligation.
When can this be invoked?
Many factors could influence the court’s decision to admit that a force majeure has occurred. I have discussed three factors, below.
Factor 1: qualification of the incident as “beyond the control”
Some events are more definitively categorized as force majeure than others based on whether they are truly outside of the control of the contracting party. Events such as wars or natural disasters are easier to qualify as force majeure events than strikes and labour disputes since the contracting party may, depending on the circumstances, have some control as to whether a strike or labour dispute occurs or continues for an extended period of time. That is not to say that the courts will refuse labour disputes as a case of force majeure, especially if it is specifically laid out within the force majeure clause of the contract.
Factor 2: Effect of the incident on the vendor’s business.
If an insignificant portion of the vendor’s factory was damaged, and the vendor’s factory was still operational, is the performance of the contract truly impossible? The severity of an event must be considered in light of its effect on the business. For example, a strike or labour dispute can make the performance of a contract equally if not more impossible to fulfil than a natural disaster.
Factor 3: Was the incident preventable?
To continue our exploding factory example from above, in AT Films Inc v AT Plastics Inc 2014 ABQB 422, a case with that exact scenario, the court considered whether the defendant’s factory explosion could have been prevented – if yes, then the court would reject the invoking of force majeure clause.
Duty to mitigate exists even after invoking force majeure
After the force majeure event has occurred, the burden on the performing party does not necessarily cease. It is highly possible that the performing party has a duty to mitigate the loss of damage. According to common law, both parties have a duty to mitigate the loss of damage during the performance of a contract. Force majeure does not excuse this duty to mitigate the potential damage. It is prudent that when drafting the mitigation clause the parties should include the “different levels of obligation to mitigate”. This avoids the need for further dispute regarding the existence of a duty to mitigate.
Highly contextual nature of claim
If a force majeure clause is invoked, the the receiver of the good or service will likely be upset about non-delivery, and, upon invoking, it’s likely that there will be a resulting dispute on whether or not force majeure this has occurred.
Cases dealing with force majeure can be burdensome for both the parties involved as well as the courts. To avoid the complexities of a force majeure trial or claim, parties should sufficiently define force majeure situations during the drafting stage of their commercial agreements. While some parties rely on the umbrella definition of what constitutes a standard force majeure clause, it would be advantageous to provide a clear and precise definition of force majeure incidents that are relative and subjective to the business of the performing party.
Read Rajah’s previous articles
Rajah Lehal is counsel to Cobalt, a law firm that advises technology-related companies and that also is a sponsor of Multiplicity Accelerator. Rajah is also a contributing author to Clausehound, an open-source legal language website. This article is provided for informational purposes only and does not create a lawyer client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at your own risk.