Understand, draft and negotiate the components of Force Majeure clause

What is a Force Majeure clause and how does it work?

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A Force Majeure clause is a provision that is commonly included in contracts to address the possibility of unforeseen events that may prevent the performance of contractual obligations.

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These events are often referred to as "acts of God" or "natural disasters," and can include a wide range of events beyond the control of the parties involved in the contract. Since the pandemic hit in 2020, this clause has drawn special attention from all contract professionals and business people.

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The purpose of the Force Majeure clause is to allocate risk between the parties and to determine what happens in the event that performance is not possible due to circumstances beyond their control.

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In this article, we will discuss the key components of a Force Majeure clause and provide guidance on how to carefully analyze and negotiate it. The following are some of the key components that are typically included in a Force Majeure clause

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Definition of Force Majeure Events:

The Force Majeure clause should define the events that will trigger the application of the clause. The definition should be specific and comprehensive enough to cover the types of events that may impact the performance of the contract. It is important to note that the list of events may vary depending on the nature of the contract and the industry in which the parties operate. For example, a construction contract may include events such as earthquakes, floods, or labor disputes, while a software license agreement may include events such as cyber-attacks, power outages, or government actions.

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Notice Requirements:

‍The Force Majeure clause should specify the notice requirements that must be followed in the event of a Force Majeure event. The notice requirements may include the timeframe within which notice must be given, the method of notice, and the information that must be provided in the notice. It is important for the parties to follow the notice requirements precisely to avoid any disputes about whether the notice was properly given.

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Suspension or Termination of Obligations:

‍The Force Majeure clause should specify whether the parties' obligations will be suspended or terminated in the event of a Force Majeure event and the duration of the suspension or termination. The clause may also specify whether the parties have the right to terminate the contract if the Force Majeure event continues for an extended period. The parties should carefully consider the duration of the suspension or termination of obligations, as this can have significant implications for the parties rights and responsibilities under the contract.

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Mitigation Requirements:

The Force Majeure clause may require the parties to take reasonable steps to mitigate the effects of a Force Majeure event, such as finding alternative sources of supply or alternative means of performance. The clause may also require the parties to work together to develop a plan for mitigating the effects of the Force Majeure event. Mitigation requirements can help to minimise the impact of the Force Majeure event on the parties' business operations.

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Excused Obligations:

‍The Force Majeure clause should clearly identify the obligations that will be excused in the event of a Force Majeure event. The clause may specify that all obligations will be excused or only certain obligations, depending on the nature of the contract and the parties' preferences. The parties should carefully consider the responsibilities that will be excused and ensure that they are consistent with their expectations and intentions.

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Timeframe for Performance:

‍The Force Majeure clause should specify the timeframe within which the parties' obligations must be performed once the Force Majeure event has ended. The timeframe may be extended to allow for the parties to recover from the effects of the Force Majeure event. It is important for the parties to agree on a reasonable timeframe for performance, as this can affect the parties' rights and obligations under the contract.

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Governing Law:

The Force Majeure clause should specify the governing law that will apply in the event of a dispute related to the clause. This can help to provide clarity and certainty to the parties in the event of a dispute.

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How to Carefully Analyze and Negotiate a Force Majeure Clause

This really depends on the type of agreement and the side on whose behalf you are analyzing and negotiating the contract. However, there are some broad direction to carefully analyze and negotiate a Force Majeure clause:

• ‍Understand the Risks: The first step in analyzing and negotiating a Force Majeure clause is to understand the risks associated with the contract. This requires a careful assessment of the nature of the contract, the parties involved, and the potential Force Majeure events that may arise. It is also important to consider the impact of a Force Majeure event on the performance of the contract and the potential losses that may result.‍
• Define Force Majeure Events Precisely: The second step in negotiating a Force Majeure clause is to define Force Majeure events precisely. This requires a clear understanding of the risks associated with the contract and the events that are most likely to occur. It is important to avoid vague or overly broad definitions that may lead to disputes in the future. The definition should also be tailored to the specific circumstances of the contract and the industry involved.‍
• Negotiate Notice Requirements: The third step in negotiating a Force Majeure clause is to carefully negotiate the notice requirements. It is important to ensure that the notice period is reasonable and that it allows the affected party sufficient time to provide notice of the Force Majeure event. It is also important to specify the mode of communication and the required content of the notice. This will help to ensure that the parties are able to assess the impact of the Force Majeure event and take appropriate measures to mitigate any losses.‍
• Consider the Consequences of a Force Majeure Event: The fourth step in negotiating a Force Majeure clause is to carefully consider the consequences of a Force Majeure event. This requires a clear understanding of the potential impact of a Force Majeure event on the performance of the contract and the losses that may result. It is important to negotiate a clause that provides a fair allocation of risk between the parties and that takes into account the specific circumstances of the contract and the industry involved.‍
• Negotiate Mitigation Obligations: The fifth step in negotiating a Force Majeure clause is to negotiate the mitigation obligations. This requires a careful consideration of the steps that the affected party can take to mitigate the impact of the Force Majeure event. It is important to negotiate a clause that requires the affected party to take all reasonable steps to mitigate the effects of the Force Majeure event. This will help to ensure that the parties are able to minimize their losses and to maintain the overall value of the contract.

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How can you leverage ContractKen to manage Force Majeure clause in your contracts better?

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ContractKen is a contract management software that can help businesses in several ways when it comes to dealing with Force Majeure clauses.

1. Rigorous analysis while drafting and reviewing the clause: ContractKen's Word Add-in can be used to analyze the clause deeply. This leverages deterministic ML models as well as state of the art Generative AI models from Open AI to offer suggestions, and identify any potential issues or areas for improvement. Take a look at this article to understand this in detail.
2. Use of clause library: ContractKen's clause library can be used by companies to compare the contract clause language with industry standard or your organization's preferred clause language. This is seamlessly integrated within Microsoft Word, enabling uninterrupted analysis and review experience for lawyers.
3. Monitoring Compliance and Performance: ContractKen can help businesses to monitor compliance and performance during and after a Force Majeure event. Our post signature product, RepoKen can be used to track variations of Force Majeure in all your signed contract, identify notice provisions and help you stay updated with any external events.