Force majeure notes

Basic principles of force-majeure law

For an introduction to the law governing force-majeure clauses, see generally Force majeure – Yale University (accessed Oct. 3, 2008) and Jay D. Kelley, So What’s Your Excuse? An Analysis of Force Majeure Claims, 2 Tex. J. Oil, Gas & Energy L. 91 (accessed Apr. 1, 2009).

For a useful discussion of a very-detailed force majeure clause, see Aquila v. C. W. Mining Co., No. 07-4255 (10th Cir. Nov. 7, 2008) (affirming district-court holding that force majeure did not excuse nonperformance), especially footnote 3 and its accompanying text.

In a 2009 opinion, eminent federal judge Richard Posner provides his take on the basics of force-majeure law, explaining his view of its origins in the doctrine of impossibility:

The doctrine of impossibility in the common law of contracts excuses performance when it would be unreasonably costly (and sometimes downright impossible) for a party to carry out its contractual obligations. If the doctrine is successfully invoked, the contract is rescinded without liability.

The standard explanation for the doctrine is that nonperformance is not a breach if it is caused by a circumstance “the non-occurrence of which was a ‘basic assumption on which the contract was made.’ ” But this explanation leaves unexplained why parties to a contract would have assumed that a condition would not occur that has occurred. Was it just a lack of foresight?

Or is the idea behind the doctrine, rather, that the parties, had they negotiated with reference to the contingency that has come to pass and has made performance infeasible or fearfully burdensome, would have excused performance? The latter is the more promising line of inquiry …

[T]he proper question in an ‘impossibility’ case is . . . whether [the promisor’s] nonperformance should be excused because the parties, if they had thought about the matter, would have wanted to assign the risk of the contingency that made performance impossible or uneconomical to the promisor or to the promisee; if to the latter, the promisor is excused. “Impossibility” is thus a doctrine for shifting risk to the party better able to bear it, either because he is in a better position to prevent the risk from materializing or because he can better reduce the disutility of the risk (as by insuring) if the risk does occur.

Liability for breach of contract is strict, which makes the performing party an insurer against the consequences of his failing to perform, even if the failure is not his fault. But formal insurance contracts contain limits of coverage, and the impossibility doctrine in effect caps the “insurance” coverage that strict liability for breach of contract provides. The analogy is to a provision in a fire insurance contract that excepts from coverage a fire caused by an act of war. So it is no surprise that … the doctrine of impossibility was successfully invoked when a wartime embargo prevented the performance of a shipping contract because the ship could not complete its voyage.

Parties can, however, contract around the doctrine, because it is just a gap filler, a guess at what the parties would have provided in their contract had they thought about the contingency that has arisen and has prevented performance or made it much more costly. As Holmes explained, “the consequences of a binding promise at common law are not affected by the degree of power which the promisor possesses over the promised event . . . . In the case of a binding promise that it shall rain to-morrow, the immediate legal effect of what the promisor does is, that he takes the risk of the event, within certain defined limits, as between himself and the promisee. He does no more when he promises to deliver a bale of cotton.”

The key is binding promise. To defeat the application of the doctrine of impossibility the contract must state that the promisor must pay damages even if he commits a breach that could not have been prevented at a reasonable cost.

Modern contracting parties often do contract around the doctrine, though not by making the promisor liable for any and every failure to perform—rather by specifying the failures that will excuse performance. The clauses in which they do this are called force majeure (“superior force”) clauses.

The name suggests a purpose similar to that of the impossibility doctrine. But it is essential to an understanding of this case that a force majeure clause must always be interpreted in accordance with its language and context, like any other provision in a written contract, rather than with reference to its name. It is not enough to say that the parties must have meant that performance would be excused if it would be “impossible” within the meaning that the word has been given in cases interpreting the common law doctrine.

Wisconsin Elec. Power Co. v. Union Pac. R.R. Co., No. 08-2693, slip op. at 2-5 (7th Cir. Mar. 2, 2009) (affirming summary judgment that railroad had properly invoked a force-majeure clause to increase its rates for shipping coal) (emphasis in original, extra paragraphing added for on-screen readability, citations and some internal quotation marks omitted).

Mitigation obligation

A mitigation-efforts requirement in a force majeure clause can give rise to a whole series of subsidiary issues. For example, if a supplier found itself unable to make deliveries because of force majeure, the question might arise whether the supplier must treat all its customers equally, or whether it can favor some over others. If the contract does not explicitly state the supplier’s mitigation obligations, courts are often extremely reluctant to second-guess the adequacy of its efforts. See Wisconsin Elec. Power (cited above) at 10-11, 13.

Mitigation clauses sometimes require a supplier to use ‘best efforts,’ or ‘reasonable efforts,’ or ‘commercially reasonable efforts.’ See generally a blog posting by Ken Adams and the extensive comments following it (including comments by this author): What the Heck Does “Best Efforts” Mean?, Jan. 23, 2008 (accessed Apr. 1, 2009).