[Updated January 9, 2012, to reflect a change to my February 2011 post prompted by Vance Koven’s comment to this post.]
In this February 2011 post I offered my version of a force-majeure provision. It included the following:
For purposes of this agreement, “Force Majeure Event” means, with respect to a party, any event or circumstance, regardless of whether it was foreseeable, that was not caused by that party and that prevents a party from complying with any of its obligations under this agreement [(other than an obligation to pay money)], on condition that that party that uses reasonable efforts to do so … .
But an inability to make a contract payment could have two very different causes. First, you might not have the money. Or second, you might have the money but might not have any means of paying it—to use an example offered by reader Chris Lemens in this comment, the FDIC shuts down your bank the day you’re due to wire money.
I suggest that rather than simply excluding from the definition of “Force Majeure Event” an inability to comply with an obligation to pay money, it would be clearer to state that you’re excluding the first basis for inability or both the first and second basis, whichever arrangement seems more appropriate.
Excluding the first basis makes sense: What if Acme’s best customer were wiped out by an earthquake, leaving a substantial Acme invoice unpaid, and as a result Acme were unable to make a contract payment to Widgetco? I can understand why Widgetco would prefer to exclude that sort of circumstance from the definition of “Force Majeure Event.”
On the other hand, if Acme were unable to pay due to Chris’s FDIC scenario, that’s less remote. Widgetco might well be more willing to have that scenario fall within the definition of “Force Majeure Event.” A court might well conclude that it does, unless it’s excluded.
Here’s my initial attempt to revise the definition of “Force Majeure Event” to exclude the first basis of inability:
For purposes of this agreement, “Force Majeure Event” means, with respect to a party, any event or circumstance, regardless of whether it was foreseeable, that was not caused by that party and that prevents a party from complying with any of its obligations under this agreement [(other than an event or circumstance that results in a party’s not having sufficient funds to comply with an obligation to pay money)], on condition that that party uses reasonable efforts to do so … .
What do you think?
3 thoughts on “Excluding from a “Force Majeure” Provision Inability to Comply with a Payment Obligation”
Well, it’s better. What intrigues me is that neither here nor in your original post do you consider a standard phrase in a FM clause that conditions the application of the clause to events and circumstances “beyond [the party’s] reasonable control,” or some such. While the question of foreseeability is appropriate to handle as you have when the event is really something one doesn’t normally plan for, I think without the missing element of reasonable control the clause might cover too much. Business life is full of events and circumstances, most of which the parties are expected to have under their control–staffing levels, spare parts supply, et cet. If performance of the contract suffers on account of these, the counter-party shouldn’t be left without a remedy.
The aspect of a FM clause that is often mentioned in the ghastly lists you rightly reject, but that doesn’t sit too well in the standard categorical phrases, is the labor dispute. Is that like an obligation to pay money, or like a meteor strike? It may well be foreseeable, since labor contracts have defined terms, and an employer can always “control” the situation by capitulating. Since “foreseeable or not” would certainly cover it, but might also cover the deleterious effects of giving your entire support staff the day off, and “reasonable control” arguably wouldn’t cover it except in the case of a wildcat strike, it might be better to call it out along with the money payment, on the other side of the ledger: strikes let a party off the hook, empty pockets don’t.
Incidentally, I have always resisted the exception for the obligation to pay money (when I’m representing the payor) for precisely the reasons Chris Lemens stated (although the example I usually give is FDR’s 1933 order shutting down the whole banking system, since that’s something that really happened, not just a hypothetical).
Vance: Yes, your first point is one certainly worth exploring. And such language is standard. As a trial balloon, I’ve added to my proposed definition “that was not caused by that party.”
That doesn’t address the issue of control, but I’m not sure that control is relevant. A hurricane destroys Acme’s plant; the plant is under Acme’s control; should that preclude Acme from having that incident constitute a “Force Majeure Event”?
But a problem with causation language is partial causation. Acme’s plant is destroyed by a hurricane, but it didn’t have state-of-the-art hurricane protection. Could you say that in part, Acme caused the plant to be destroyed?
A few alternatives:
1. “(other than the party’s insolvency)”
2. “(other than the party’s inability to pay debts as they come due)”
3. either of the above, with the addition “even if caused by some other event”
Also, I agree with Vance’s comment. I don’t think the “on the condition that” language in your original post captures th enotion that the event must itself have been one that was beyond the party’s reasonable ability to prevent or mitigate.