Investing

Lessons of and Incidents of Force Majeure

Force Majeure is perhaps one of the least favored aspects of corporate law.  In short, Force Majeure is that odd exception that suddenly gives a supplier or a customer a pass on its contractual obligation for a period of time.  News has been out today that Libya declared Force Majeure on its energy supply agreements.  If this is system-wide, then suddenly any nations or companies relying upon Libya can expect that either oil or gas will now not arrive as contracted or that severe interruptions and delays can be expected.  Because so many investors do not really consider Force Majeure when making investment decisions, we wanted to go over a more broad sampling of Force Majeure and the ramifications that can be considered.

Dictionary.com lists the most basic definition as “an unexpected and disruptive event that may operate to excuse a party from a contract.”  This is rather narrow and Force Majeure is far reaching compared to this brief definition.  The narrowly defined term also leaves quite a bit of room for what this implies in certain sectors and certain industries.

Incidents of Force Majeure are generally spelled out in a unique manner in each industry.  Some of the “instances” would normally read as being acts of God, acts of a public enemy, terrorist acts, war, civil disturbances, insurrection, fires, floods, accidents, blockade, embargoes, storms, explosions, damage to plants, labor disputes, acts of governmental bodies, perils of the seas, failure of or delay of third parties or governmental bodies on the other side.

Under most circumstances, failures or delays generally do not give parties the right to terminate contracts but they can temporarily create exceptions.  It is also common that each party in contracts will use reasonable efforts to minimize the duration and consequence of delay or failure in performance resulting from a Force Majeure event.

What would be examples of Force Majeure in a sample of industries?  Many contracts are subject to disruption under Force Majeure in many sectors and we wanted to highlight perhaps a short sampling.

In oil and gas, this could be storms, interrupted operations of terminals, pipelines or canals, civil unrest, site accidents, terrorism, theft, natural disasters, and more.  A coup in an a nation resulting in the local shutdown of industry would definitely be considered under Force Majeure.  An oil tanker operator would definitely be able to claim Force Majeure if the oil they were delivering was interrupted due to the transport vessel being captured by Somali pirates.

In the financial sector, this could result in sudden and unforeseen regulatory changes, a sudden and unexpected bankruptcy of trading partners or in debtors/creditors, unplanned market closures or halts, and much more.  Natural disasters affecting the employees of or the ability of an entity to actually conduct business would be a Force Majeure event.

In the electricity or other utility business, Force Majeure can be declared in many circumstances.  Hurricanes knock out power infrastructures.  Earthquakes can take out entire municipal water systems and power lines.  Fires can literally melt power lines.  Hard freezes can choke off waterlines and powerlines alike.  A tornado can literally take certain infrastructure sites off of their physical locations and cause the need to rebuild.

Travel, airfare, cruises would declare Force Majeure if a natural disaster interrupted an ability to physically make a trip, if terrorism shut down travel, if sudden unforeseen accidents or repairs made transportation unavailable, and on.  In short, if you vessel cannot get to a location due to areas outside of the carrier’s control, in some cases there is little recourse.

In technology, it is frequent for companies to have several key customers or sole suppliers.  Companies could declare Force Majeure if natural resources were suddenly choked off or were delayed in delivery.  Think rare earth materials from China in technology or defense technology.  Earthquakes have damaged chip factories.  Supplies have been held up in customs.

In other natural resources, there are many Force Majeure triggers.  Coal supplies out of Australia were greatly interrupted due to widespread flooding.  Act of God.  Timber companies would declare Force Majeure for their contracted lumber supplies in certain markets if they were unfortunately hit by a forest fire.  Act of God.

Food is also subject to Force Majeure.  What if a transportation vessel carrying food is destroyed, breaks down, or is just delayed?  Not all instances will result in Force Majeure, but it is frequent that it is invoked. Crops can be destroyed by floods, fire, or snow.

Generally speaking, the term Force Majeure is embedded in any contract you have.  Sometimes it actually happens.  When dealing with foreign markets and many less stable emerging markets, Force Majeure can become the norm rather than the exception.

JON C. OGG

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