A force majeure clause in a contract releases a party of non-performance liability due to the occurrence of events that cannot be reasonably predicted.
This can be like a “get-out” clause that releases the non-performing party from being in breach of contract.
Force majeure itelf is a term that refers to unavoidable and unpredictable causes of failure in performance.
In a contract agreement made by two or more parties, all sides would have contractual obligations that need to be fulfilled according to the terms of the contract.
For a service provider, the responsibility is usually to provide the service procured within a stipulated time frame.
For the buyer, the obligation is to pay the agreed amount for the services rendered when it has been satisfactorily delivered.
In the event that the service provider is unable to meet the obligations in the contract, the buyers would have the legal right to sue for damages for non-delivery.
This is especially so when the failure to deliver services had resulted in the buyer incurring losses.
For example, a manufacturer might have ordered a huge shipment of semi-conductor chips from an overseas supplier so as to have the intermediate goods to build electronics products for a festive period that has been promoted with an expensive advertising campaign. But due to an earthquake in the area where the foreign factory was located, workers were not able to produce the required chips.
Under normal circumstances, the buyer might be able to take legal action against the vendor for non-delivery as it has costs them the massive marketing campaign for a product that was never able to reach the market of consumers. They would have also incurred opportunity cost in the form of sales revenue that could be generated from the festive period.
But if the supplier had the foresight to negotiate a force majeure clause into the contract that specifically mentioned such unforeseen events, then the supplier would be able to shield itself from non-performance breach of contract. Effectively giving itself immunity.
Companies who intends to use force majeure clauses to protect themselves from liability should consul the expertise of lawyers.
This is because it can be observed in court documents that such clauses don’t always present a strong case for defendants. Especially when the wording is vague.
The core concept here is that the event that caused the delay or failure in performance has to be unforeseen.
And whether certain events that caused certain circumstances are reasonably unforeseeable can often be subjective.
For example, if the reason for non-delivery is an economic downturn, it can be argued that economic downturns can be predicted as there are always signs that things are not right in a market before things eventually fall apart.
So the best force majeure clauses from the perspective of service providers are those that are as specific as possible.
Keep in mind that they are supposed to be for unforeseeable events. They are not meant to provide umbrella protection against all types of general events.
Otherwise, getting liability insurance might be the more practical form of protection that businesses can obtain coverage for.