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Force Majeure and Acts of Government

Business Law Alert Edwin J. Broecker

Now that Houston is beginning to get back to work following the devastation of Hurricane Harvey, many of the businesses will be reviewing their contracts to see whether there is any relief excusing their failure from performing because of the hurricane. The applicable provision in most of these contracts is referred to as a force majeure clause.

Literally “force majeure” translates from French as a “superior force.” According to Black’s Law Dictionary, force majeure is defined as “An event or effect that can be neither anticipated nor controlled.” Force majeure clauses allocate risk between the contracting parties if performance becomes impossible or impracticable because of an unforeseen event. Force majeure clauses are often included in supply agreement to excuse the supplier from performing its obligations under the contract under certain conditions outside the supplier’s control. If the conditions exist and the supplier cannot perform, the supplier is not in breach of contract, and the buyer cannot recover damages for breach.

Obviously Hurricane Harvey and similar catastrophic acts of God are events that are neither anticipated and cannot be controlled by any supplier. Nevertheless, many suppliers also try to expand the list of unforeseen events to include “acts of the government”. In fact, in the wake of the cleanup efforts, several residents of Houston filed a lawsuit, Val Aldred et al. v. Harris County Flood Control District and the City of Houston, claiming that the Army Corps of Engineers intentionally flooded and “took” their property because the Corps released water from a reservoir to avoid more widespread flooding if the reservoir overflowed.

Two other recent events highlight the potential risks associated with the inclusion of “acts of the government” in force majeure clauses. In Kyocera Corporation v. Hemlock Semiconductor, LLC, 2015 WL 7779299 (Mich. Ct. App. Dec. 3, 2015), Kyocera sought to use a force majeure clause which included, among other things, “acts of the Government” to invalidate a “take or pay" contract. The alleged acts of the government at issue was a trade war between the United States and China and the subsequent decision by the Chinese government to illegally subsidize the price of polysilicon. This caused the price of polysilicon to drop well below the agreed-upon price under the contract. The Michigan Court of Appeals affirmed a $2.0 billion judgment against Kyocera and concluded that the force majeure clause “does not provide any potential relief from [plaintiff’s] obligation to pay merely because the contract price is no longer financially advantageous.” The Court went on to state that the contract does not specify the acts of which government is at issue and that if the parties wanted to cover the situation that a government’s manipulation would cause the contract to be unprofitable, then they could have specifically included such a provision.

Similarly, in February 2017, the world’s largest publicly traded copper producer, Freeport-McMoRan Inc. (Freeport), declared force majeure on certain deliveries of copper concentrate in Indonesia. Freeport claimed that the cause of the force majeure event was a breakdown in negotiations with the Indonesian government in relation to new requirements for a new mining permit before being able to export. The new permit would require Freeport to pay taxes and royalties it was previously exempt from and divest up to 51 percent of its Indonesian unit, an increase from a previously set 30 percent. While no reported cases have resulted from this claim of force majeure, this case is indicative of the types of claims that may become more prevalent as foreign countries try and converse and control their natural resources or key industries.

Buyers in the supply chain should do a few things to try and limit overbroad force majeure clauses:

  • Buyers should try and establish dual sourcing for most critical components;
  • Buyers should require business continuity plans and narrow the definitions of force majeure for its key components, recognizing that most force majeure events, by their very nature, tend to be localized and isolated;
  • Buyers should include notification and updates obligations within the force majeure clause;
  • Buyers should include an allocation provision within the force majeure clause for supply disruptions and waive seller’s rights under § 2-615 of the UCC;
  • Depending on the bargaining power, request that the supplier pay for any additional costs incurred in finding replacement supply during the period of force majeure; and
  • Buyers should provide termination rights in the event that the force majeure is not corrected within a reasonable time. There is nothing worse than for a buyer to have to find a replacement supplier for nine months and then have the original supplier come back online and demand that the original agreement be enforced.

For questions, please contact Edwin J. Broecker at [email protected]/(317) 399-2828 or your Quarles & Brady attorney.