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Just Because There is a Force Majeure Does Not Mean There is No Breach of Contract
Many business contracts contain force majeure clauses. For clarity, these might be better called “disaster clauses” or “big-things-beyond-our-control clauses.” The general idea is that performance under the contract is suspended or excused in the event of some force majeure or disaster. Generally, the contract at issue describes what is to be considered a force majeure. Often, the claim made in any ensuing litigation is whether the particular event that occurred falls within the definition of force majeure that is set forth in the contract.
But, even if all parties to the contract agree that some force majeure or natural disaster has occurred, unfortunately, that does not end the controversy. To benefit from a force majeure clause, the party invoking it must still prove causation and sufficient or reasonable efforts to avoid the consequences of the natural disaster.
A good case example comes from an old case called Butler v. Nepple, 54 Cal. 2d 589 (Cal. Supreme Court 1960). In that case, the contract — an oil drilling lease — contained this force majeure clause:
“… obligations of the [drilling company] … shall be suspended while the [drilling company] is prevented from complying therewith, in whole or in part, by strikes, lockouts, actions of the elements, … or other matters or conditions beyond the control of the [drilling company] …”
There were certain deadlines in the lease (and other contracts) and the drilling company missed the deadlines. In the litigation, the drilling company argued that there was a union worker strike in the steel industry that prevented the drilling work from being completed on time. To complete the project, the drilling company needed steel casings for the drill well.
The fact that there was a strike in the steel industry was not disputed by the other parties in the lawsuit. However, the other parties disputed causation and whether the drilling company could have taken reasonable steps to avoid the consequences of the strike. In particular, the other parties argued that steel casings could have been purchased from other sources. In response, the drilling company argued that the other-sourced steel casings would have been more expensive. Unfortunately for the drilling company, extra expense is not an excuse for non-performance. Under California law, greater expense does not allow a party to escape performance unless the extra expense or financial loss is “extreme and unreasonable.” In the Butler case, the jury did not believe the extra expense was at that level and therefore rejected the force majeure defense. The result was affirmed by the California Supreme Court.
San Diego Corporate Law: Force Majeure Contract Language
Since force majeure clauses are entirely contractual in nature, the parties can draft the language to reflect the parties’ collective intent. Thus, as an example, the contract language could eliminate entirely the requirement that “reasonable steps” are necessary to avoid the effects of a force majeure. Alternatively, if cost is a potential issue, then the contract can define what is an “excessive” cost-of-replacement for purposes of what is deemed “reasonable” in avoiding the force majeure effects. As always, it is important to have a good San Diego corporate lawyer draft and review your business contracts.
Contact San Diego Corporate Law
For more information, contact experienced corporate attorney Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has many years of experience helping San Diego businesses with all of their transactional legal needs. Mr. Leonard has been named a “Rising Star” for three years running by SuperLawyers.com. Contact Mr. Leonard by email or by calling (858) 483-9200.
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