Update: A little over a year after Hurricane Irene blew through, Hurricane Sandy dealt a devastating blow to the Eastern Seaboard. And our advice remains the same: review of force majeure clauses is in order, first to assess their implications for the current crisis, and for the long term, to prepare for the next time.
The gusts of hurricane Irene were still blowing outside as the winds of “force majeure” gathered force in the minds of lawyers around the country. Long before the storm subsided, storm-related interruptions in contract-procured services caused clients and their lawyers to wonder, “what does the force majeure clause say?”
The service interruptions caused by the hurricane are sure to lead to claims and disputes centered on that often-overlooked clause found in many service contracts. While not typically one of the most heavily negotiated clauses of a typical contract, when a hurricane like Irene causes a significant disruption in service, force majeure clauses take center stage in determining each party’s rights, responsibilities and remedies.
Is the question as simple as whether or not a hurricane is a “force majeure” event? No, in fact, this may the simplest of the questions to answer. There are, however, many other issues involved.
First, and most basic, is the question of whether a party’s performance is actually excused. Often, specific obligations are carved out of force majeure clauses. For example, the payment of money is often an exception to the clause.
Second, what are the conditions to the invocation of the force majeure clause? A service provider’s ability to be relieved for a force majeure event is often conditioned on their taking certain steps immediately upon the occurrence of the event – even if, like Hurricane Irene, it occurs on a weekend. For example, often a service provider agrees to have a disaster recovery or similar plan in place to avoid disruption in service in the event of a disaster. Sometimes, relief is only available under a force majeure clause if the service provider activates that plan in a timely manner. In addition, failure to spring the plan into action could be a breach in its own right, which may not be subject to relief under the force majeure clause. Other time-sensitive requirements and conditions could include providing notice to the recipient of the services, taking certain steps to transfer data files or processing, or taking other steps to mitigate the effect of the event.
Third, exactly what performances are to be excused by the clause? Is the clause written specifically to say that only the obligations directly impeded by the force majeure event are excused, or does the clause give the party a broader waiver? For example, if the storm interferes with the service provider’s ability to provide customer support, does the force majeure clause relieve the service provider from data security requirements?
Fourth, what level of diligence and effort does a party have to exercise to minimize the effect of the force majeure event on its ability to perform? Once a party invokes the force majeure clause, what do they have to do to overcome the problem?
Fifth, if one party’s obligations are excused because of a force majeure event, what about the obligations of the other party? Are they excused as well or must they continue to perform?
Finally, other than excusing non-performance, what are the other implications of a force majeure clause? Sometimes, force majeure provisions have termination rights associated with them, whereby the party not affected by the event can terminate the contract if the inability to perform extends beyond a certain amount of time. To the extent Hurricane Irene leaves service providers out of commission for any extended period of time, this may become relevant. Also, an inability to perform due to a force majeure event sometimes allows the client to procure the services from an alternate supplier – and sometimes converts an exclusive relationship to a non-exclusive one.
Companies affected by Irene – either themselves or through the impact of the storm on business partners – should be thinking about their force majeure clauses. Service providers should consider whether the force majeure clauses in their contracts offer any relief to hurricane-related problems. Customers should be asking what are their service provider’s rights and responsibilities regarding hurricane-related problems.
In any case, attorneys are well-advised to keep Irene in mind the next time they are tempted to skim over the force majeure provision in a difficult contract negotiation.