Force majeure clauses in California commercial contracts shift performance loss risk from one party to another if an uncontrollable, unforeseen event occurs, such as the COVID-19 pandemic. Generally, the force majeure clause's terms and conditions define the effect and scope, providing a contractual defense in the event of a related breach.
Many businesses utilize boilerplate contracts, which can be a huge issue legal headache if they trigger unintended outcomes. Ensure you take the time to negotiate your force majeure clauses for individual transactions to prevent this issue from arising.
Components of a Force Majeure Clause
Force majeure clauses are generally inserted as a clause into a contract. However, they can function as stand-alone agreements in specific situations. Below is an outline of six common components of a force majeure clause:
- Component 1. Parties: Identify the protected and obligated parties, or if the agreement is reciprocal by and among them.
- Component 2. Obligations: This component should detail that the party should notify the protected party of an event. It is also a good place to discuss mitigation of damages.
- Component 3. Scope: Detail what events the force majeure clause covers.
- Component 4. Period: Define whether the clause lasts the contract term or for a specific period.
- Component 5. Exclusions: Businesses may exclude certain events.
- Component 6. Notification: This component informs obligated parties that they must notify the protected party by a specific time of a triggering vent.
Ensure that you speak with a contract lawyer if you have questions about what to include in your business contracts.
List of Force Majeure Events
California commercial contracts historically used force majeure clauses to address unforeseeable acts exclusively. They provide a broader range of covered circumstances affecting the contracting parties' interests more recently. The underlying test for the majority of force majeure clauses is the conceivability of the vent when they entered into the contract and beyond the contracting party's control.
Here are the four events generally covered:
- Event 1. “Acts of God,” such as natural disasters
- Event 2. War, terrorism, and pandemics
- Event 3. Government changes in regulation, condemnation, or expropriation
- Event 4. Labor and strike issues
Force majeure is not always limited to the equivalent of a natural disaster in California. The test is whether an insurmountable challenge occurred without the party's interference that they could have prevented via due diligence measures. For example, supply cost increases generally do not trigger the force majeure clause unless caused by extreme, unreasonable circumstances per Butler v. Nepple, 54 Cal.2d 589.
Negotiating Force Majeure Clauses
Contract negotiators are well aware that the party with the superior bargaining power obtains the favorable clauses. If you are are in the power position, you will need a well-crafted clause that protects your interests. Here are our top three tips that can help your business negotiate force majeure clauses:
- Tip 1. Read the clause carefully to determine if it is reciprocal or one way, who it protects, and if the terms are practical.
- Tip 2. Carefully draft the terms as broad or specific as you need to achieve the intended purpose sufficiently.
- Tip 3. Flesh out the obligations and exclusions section of the force majeure since specific terms and conditions can mitigate against a defense of “unforseeableness.”
Negotiating force majeure clauses is an important component of personalized contracts for your business. Many companies favor boilerplate templates out of convenience. However, they can result in unintended legal consequences that affect your company's bottom line.
Get Legal Help with California Commercial Contracts
If you need legal advice in contract drafting and acceptance, HAN LLP's legal team is ready to help. Connect with a contract attorney in New York or Los Angeles here.