backIntroduction
The receipt of a force majeure notice is rarely a welcome development in the day of a busy in-house counsel.
While force majeure provisions are a fixture of commercial contracts, the notices that invoke them often arrive at the most inconvenient moments and under the most contested circumstances. A force majeure claim can have serious implications and, whether the triggering event is a natural disaster, a grid emergency, a government sanction, an armed conflict, or a pandemic-related disruption, receiving a force majeure notice from a counterparty is not a routine administrative matter. How you respond in the first hours and days can materially affect your rights, financial exposure, and commercial leverage.
Here we discuss five practical tips for senior in-house counsel to keep in mind when a force majeure notice lands on your desk.
Tip 1: Start with the Contract, Not the Event
It is tempting to focus immediately on the significance of the underlying event. However, force majeure is typically a contractual remedy, rather than a statutory one. The relief available to your counterparty generally depends largely on what the parties negotiated and memorialized in the relevant agreement. While some civil law jurisdictions recognize force majeure as a doctrine embedded in their civil codes, the contractual definition will typically govern in the first instance, and in common law jurisdictions such as England and Wales, Singapore, Hong Kong, and New York, there is no freestanding doctrine of force majeure at all. In either case, the starting point is the four corners of the contract.
Begin your analysis by pulling the actual agreement and reading the force majeure clause carefully, focusing on the strict requirements for invoking relief. Frequently, force majeure clauses have specific conditions which must each be met and procedures which must be followed exactly before a party can send a valid notice. Key questions to ask include:
- Does the clause contain an enumerated list of qualifying events, or does it rely on broader catch-all language, or perhaps both?
- What level of disruption is required – does the clause require that performance be “prevented,” “hindered,” or “delayed”?
- Is there a foreseeability requirement or a materiality threshold? Is the party claiming force majeure required to act to a particular standard when considering these requirements, for example in good faith and/or as a “reasonable and prudent operator”?
- Are there any obligations (such as payment obligations) which must still be performed even if force majeure excuses performance of other obligations?
- Is the claim to force majeure available by reference to events impacting other parties within the contract chain, including, for example, any upstream suppliers? Is force majeure available by reference to the actions of third parties?
- Are there specific notice requirements for force majeure, including specific timing, form, or content requirements that must be satisfied as conditions precedent to relief? If there are no specific notice requirements, does the underlying contract specify how notice must generally be given?
- What is the liability regime under the contract? Is there a cap or limitation on liability for non-performance and/or a liquidated damages regime? If a force majeure declaration is later proven to be invalid, you will want to be sure you have considered and met the requirements of these provisions.
- What is the governing law of the contract? Is the contractual language supplemented or even overridden by statutory or codified provisions?
Only after you have mapped the precise contours of the clause can you meaningfully evaluate whether the counterparty’s notice has any merit. Resist the urge to engage in a general policy discussion about whether the underlying event “should” qualify. In common law jurisdictions, the contract is the governing instrument. In civil law jurisdictions, be aware that codified force majeure provisions may supplement or, in some cases, override the contractual terms, particularly where the contract is silent or ambiguous.
Tip 2: Scrutinize the Mitigation Obligation
A force majeure clause does not necessarily excuse performance simply because an extraordinary event has occurred. In many agreements, and under prevailing judicial interpretation in most jurisdictions, the party invoking force majeure must typically first demonstrate that it has actually been impacted by the event in the way required by the contract (or applicable statutory provisions), and has taken all reasonable steps to avoid or mitigate the impact of the event on its contractual obligations.
Force majeure cannot usually be properly declared until the counterparty has exhausted reasonable avenues of mitigation. What is reasonable will necessarily depend on the nature of the underlying contract and the counterparty’s relevant obligations. It can also be informed by any prior practice established between the parties.
When reviewing a notice, probe for specifics. Has the relevant event prevented or impeded performance in the way required or is the impact merely anticipated? What steps has the counterparty taken to perform or to find alternative means of performance? If the counterparty has done nothing more than identify the event and declare itself excused, that is a red flag. A bare assertion that performance is impossible, without supporting detail on how the event is said to have prevented or impaired performance, or the efforts undertaken to mitigate or overcome the event, should be challenged. It will also be important to assess whether performance truly has become impossible or merely more onerous or costly. Typically, increased economic burden is not a valid ground to invoke force majeure. The delivery of a force majeure notice following shortly after a triggering event is also a red flag, as this will likely mean insufficient time has passed for the event to have the required impact or to allow for mitigating action.
Request documentation. Ask the counterparty to describe and substantiate, in writing, how its performance has been prevented/impeded and the specific mitigation steps it has taken (and why those steps were insufficient to allow continued performance). This information is critical both for your immediate assessment and for any future dispute. Request timely updates to ensure that your own strategy and downstream obligations can respond appropriately to new information.
Tip 3: Recognize That Force Majeure Notices Are Often Strategic
Experienced commercial actors – and, where relevant, the trading desks that support them – understand that force majeure notices can be deployed strategically. For example, in volatile commodity and energy markets, force majeure is frequently declared early and aggressively, sometimes at the first hint of a potentially qualifying event, and sometimes before the event has actually impaired performance.
Do not assume that every force majeure notice is delivered in good faith or that the underlying event has in fact prevented performance (or will, in any event). Examine the timing and context carefully:
- Was the notice sent before the event actually affected the counterparty’s operations?
- Is the counterparty continuing to perform under other, more favorable contracts that are subject to the same event?
- What is the commercial status of the contract for the counterparty relative to the market at the time?
- Does the counterparty have something to gain from declaring force majeure, including because market prices have become more favourable than the contract price?
- Is the counterparty simultaneously active in the spot market, buying or selling the very commodity it claims it cannot deliver or accept?
Understanding this dynamic is essential. When markets are dislocated, force majeure notices tend to proliferate, and many of them do not survive serious scrutiny.
Tip 4: Respond Promptly But Preserve Your Rights
The way you respond to a force majeure notice is just as important as the substance of your analysis. A poorly worded response can inadvertently waive your right to challenge the notice or to assert valuable claims for breach later, or at least concede strategic negotiation leverage. Silence, too, carries risk, as some contracts impose deadlines for objecting or treat a failure to respond as acquiescence.
Typically, aim to acknowledge receipt of the notice promptly while expressly reserving all your rights and remedies under the contract and at law. Reservation-of-rights language accomplishes two objectives. First, it signals that you are engaged and taking the matter seriously, which can deter further opportunistic behavior. Second, it protects your legal position by making clear that you have not accepted the validity of the notice, agreed to any suspension of performance, or relinquished the right to pursue damages or termination if the notice proves unfounded. The exact content of the response should be tailored to the specific contract and circumstances.
As a general rule, regardless of the anticipated ultimate outcomes, in your initial response it is advisable to avoid making any concessions about the legitimacy of the underlying event, the applicability of the force majeure clause, or the counterparty’s entitlement to relief. These are matters that require careful investigation, and premature admissions (even informal ones made in the spirit of commercial cooperation) can be used against you later.
Tip 5: Assemble the Right Team and Build the Record
Force majeure disputes are inherently cross-functional. The legal analysis cannot be conducted in isolation from the commercial, operational, and market realities. As soon as you receive a notice, assemble a working group that includes, at a minimum, the relevant commercial or trading personnel, operations and logistics staff, and outside counsel. Maintaining legal privilege will be important, so while this group should include all the important stakeholders, it should be kept tight-knit.
The commercial team can help you assess whether the counterparty’s claims about market conditions and operational constraints are credible. The operations team can evaluate whether the asserted event actually prevents performance or merely makes it more expensive or inconvenient – an important distinction, since increased cost alone is generally insufficient to support a force majeure claim. Investigation of the conduct of the counterparty may be useful – for example exploring when relevant vessel diversions occurred relative to relevant events, impacts and notices/claims. Depending on the nature of the force majeure claim and the values at stake, you may also consider appointing an independent expert to assess the circumstances in question. The commercial and operations teams can also assist in analyzing your obligations to your own downstream counterparties who may be impacted by the force majeure notice and subsequent nonperformance of the counterparty claiming it. This is particularly true if your company is in the middle of a supply chain.
Outside counsel can advise on jurisdiction-specific case law, arbitration strategy, and the interplay with related doctrines – such as frustration of contract under English law, impracticability and hardship under certain civil codes, or impossibility under U.S. common law.
Equally important, begin building a contemporaneous record from day one. Preserve all correspondence, internal communications, market data, and operational reports that bear on the counterparty’s claim. If the matter escalates to litigation or arbitration, the quality of your documentary record will be a decisive factor. Do not rely on memory or informal understandings; reduce every material communication to writing.
Finally, in the event you do challenge the validity of a force majeure declaration, it is relatively common for agreements to stipulate that any losses claimed must be properly documented. Once it becomes clear that your counterparty will fail to perform its obligations, document all the steps you have taken to ensure performance of your own downstream obligations, the losses you have suffered as a result of the non-performance and the steps you have taken to mitigate those resulting losses. If your contract only permits recovery of certain classes of loss or cost or of such losses or costs up to a limit, consider carefully how best to ensure recovery.
Conclusion
A force majeure notice is not a self-executing instrument. It is the opening move in what may become a significant commercial and legal dispute. By grounding your analysis in the contract language, insisting on evidence of impairment and mitigation, responding carefully to preserve your rights, and mobilizing the right resources from the outset, you place your organization in the strongest possible position, whether the matter is resolved through negotiation or through legal proceedings.
Should you have questions about a force majeure notice you have received, or about the force majeure provisions in your existing agreements, please reach out to the authors listed below.