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Four Essentials For An Effective 'Act Of God' Clause

07 April 2013

As I write this last weekend’s rain here in the Waikato is a distant memory, the sun is shining and the forecast is for more dry weather, at least until some time in April. A drought has been officially declared over all of the North Island, and parts of the South Island.

In legal terms, a severe drought is likely to be a “force majeure” event. It refers to a circumstance or event which is beyond the control of a party to a contract, the effect of which means that party can’t perform or comply with some or all of their obligations under the contract.

Force majeure events are generally understood to include acts of God, nature, war or government. However, the events aren’t limited to these things and a contract may include a specific definition of what constitutes a force majeure event for the purposes of the contract between the parties.

The reason for including a force majeure clause in a contract is to protect the positions of both parties where the specified event occurs and some or all obligations of either party can’t, as a result, be performed.

A well-drafted clause will set out four things:

First, the types of events which will trigger the clause;

Second, a requirement that the party affected by the event give full and prompt notice to the other party;

Third, the clause will set out what actions each party needs to take in respect of obligations under the contract that are effected by the event;

Fourth, the clause will generally also provide for full termination of the contract if the event means an “essential” obligation can’t be met within a reasonably extended timeframe.

In many contracts force majeure clauses are included at the end of the contract, with the other “standard” legal clauses, and without much (if any) consideration of their practical effect on the parties. While this may not be an issue in some cases, if does pay to consider potential effects of major events on your obligations and how these could be dealt with. For example, consider the knock-on effect in this chain of events. You’re not a farmer directly affected by the drought. However, you have a contract under which a farmer is to supply you with widget-beans for processing. In turn you have a contract with a food manufacturer to supply them with processed widget-beans for conversion into a high-end bread product.

Both of these contracts will be affected by the drought – the force majeure event. How do both contracts to which you are a party deal with force majeure? Do the clauses work together? You also need to think about how your insurance arrangements relate to force majeure clauses in your major business contracts with suppliers and customers. It’s important to note that the legal term “force majeure” can cover different events in different countries, so if you’re entering into contracts with offshore parties a specific definition of what events the term covers is recommended. Obviously it’s impossible to make provision in a contract for the effect of all acts of God and other events which are beyond your control. However, it is possible to think about how your business contracts link together, and how the effect of a major event in one part of the chain may affect your ability to perform your obligations in another. Without an appropriately drafted force majeure clause in all your major business contracts you may be at risk from those events of “major and unavoidable force”.

 

 

Dan Moore is a partner of Norris Ward McKinnon. Information in this article should not be a substitute for legal advice. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.