In recent years, natural disasters have become increasingly frequent and severe, disrupting industries and communities worldwide. Events such as Hurricane Helene and the extreme weather conditions experienced in Western North Carolina have highlighted the need for businesses and individuals to be fully aware of the legal mechanisms that parties can use to mitigate the impact of unpredictable events. As a North Carolina-based global law firm, we feel particularly close to these issues in light of recent events. 

One key provision that plays a critical role in this context is the force majeure clause and/or material adverse event clause in contracts. A force majeure clause is a contractual provision that excuses one or both parties from fulfilling their obligations when unforeseeable circumstances—often referred to as “acts of God”—make performance impossible or impractical. These events can include natural disasters, wars, pandemics, or government actions that directly affect the contract’s execution. Force majeure clauses became critical during the COVID-19 pandemic, which disrupted business worldwide, and have once again proven vital in the face of natural disasters.

Understanding Force Majeure

1. Mitigating Financial Losses: When disasters like Hurricane Helene or the devastating floods in Western North Carolina strike, businesses are often unable to operate normally. Further, these type of disasters may impact supply chain for non-North Carolina businesses, such as the closure of Interstate 40 and most roads in Western North Carolina that are a vital route to the Southeast. Force majeure clauses can prevent financial losses by relieving parties from liability for non-performance due to circumstances beyond their control, ensuring that neither side is held accountable for breaches in such cases.
2. Clarifying Legal Obligations: Well-drafted force majeure clauses clearly define what constitutes a triggering event, protecting parties from ambiguity. For instance, if a contract lists specific events like hurricanes or floods, parties can more easily invoke the clause when such disasters occur, providing a legally sound basis for delay or non-performance.
3. Preserving Relationships: Natural disasters strain not only operations but also business relationships. A clearly articulated force majeure clause can protect partnerships by preventing disputes over who is at fault when unpredictable events occur. By addressing risks proactively in the contract, both parties can move forward cooperatively once normal conditions resume.
4. Adapting to Changing Risks: Given the growing unpredictability of weather patterns and natural disasters, businesses need to ensure that their force majeure clauses are up-to-date and comprehensive. Including provisions for specific events like hurricanes, flooding, or other climate-related disasters helps businesses anticipate risks and plan accordingly.

Force Majeure Provisions in M&A Contracts

In the context of mergers and acquisitions (M&A), force majeure clauses also play a vital role. During the negotiation process, unforeseen events can impact the valuation of the target company or the feasibility of the deal. This is particularly relevant in a non-simultaneous sign and close structured transaction. A well-drafted force majeure provision in an M&A agreement can provide a framework for addressing situations where external factors significantly alter the business landscape.

For example, if a natural disaster disrupts operations or if a pandemic affects market conditions, the force majeure clause may allow parties to delay closing or renegotiate terms without incurring penalties. This flexibility is crucial in preserving the interests of both buyers and sellers, allowing them to navigate uncertain circumstances without jeopardizing the transaction.

Force Majeure Clauses in Other Contracts

Businesses are wise to consider force majeure clauses in all of their key contracts. It is an opportunity to plan for the unpredictable. For example, if you sell widgets and can make 1 million widgets a year, you might not think twice before signing a contract to supply 10,000 widgets—a small percentage of your capacity. But what happens when all the truckers that transport the components of your widgets go on strike? Or when the road to get the key component is washed away? Or your factory loses power?

Businesses often think counterparties will “understand” and work with them when such unpredictable events occur. That is often right, but the fact of the matter is there is a cost associated with non-performance. If your widgets are needed for a big event and the buyer has to cancel the event—resulting in millions of dollars of damages—they might “understand,” but who pays for that loss? A force majeure clause can answer that question before the problem occurs and protects your business for losses that are no one’s fault.

Litigating Force Majeure

A force majeure clause can relieve you from performance and excuse any damages owed under a contract you cannot fulfill. Of course, whenever there is a loss, there is often litigation. Litigation surrounding force majeure clauses often centers on what constitutes “force majeure.” For example, a counterparty may argue that a certain business was aware of the risk of a hurricane and should have been prepared for it; they will argue such an event is not unpredictable, and thus the clause should not apply. 

Unfortunately, case law does not provide a lot of guidance on what constitutes “force majeure” because every force majeure clause is different. Because of that, it is critical to have a strong force majeure clause that defines force majeure, but also leaves the definition open enough to cover the unexpected. During COVID-19, many force majeure clauses omitted “pandemic” as a defined event—after all, who expected COVID-19? Those that explicitly listed pandemics were on solid ground, others had language broad enough to cover a pandemic.

It is also important to consider what you do not want to be considered as “force majeure.” By way of example, you may want to be able to recover damages from a shipping contract if the shipping company’s employees go on strike. A strike, in that situation, may be different than a hurricane or a flood that prevents goods from being delivered. Therefore, each situation and contract requires a separate analysis of what is really force majeure and what is damages for non-performance. That decision is better made at the contract formation phase than in later litigation.

Lessons from Recent Disasters

The disastrous flooding in Western North Carolina and Hurricanes Helene and Milton serve as reminders that the unexpected can, and often does, happen. Businesses that fail to include or properly understand force majeure clauses may find themselves facing severe financial consequences or protracted legal disputes. By recognizing the importance of these clauses and ensuring they are carefully tailored to cover relevant risks, parties can protect themselves from the legal and financial fallout of disasters.

In light of these lessons, it is critical for businesses, contractors, and legal professionals to review and strengthen their contracts’ force majeure clauses to ensure they are prepared for future disruptions. Understanding and utilizing this provision can make the difference between weathering a disaster and suffering unnecessary losses.

A clear and specific force majeure clause is a challenge because it is difficult to plan for the unpredictable. However, it is worth the time and thought as to what can really impact your business and ability to fulfill your contracts. Indeed, even if a vague force majeure contract stands up in court, it may take months (or longer) and hundreds of thousands of dollars to get such a ruling. By then, the harm has been done and the money spent. A strong and clear force majeure clause can avoid such litigation in the first place.