Force Majeure

Loading the player...

DEFINITION of 'Force Majeure'

A French term literally translated as "greater force", this clause is included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict participants from fulfilling obligations.

BREAKING DOWN 'Force Majeure'

Force majeure is related to the concept of an "act of God," meaning an event for which no party can be held accountable, such as a hurricane or a tornado. Force majeure also encompasses human actions, however, such as armed conflict. Generally speaking, for events to constitute force majeure, they must be unforeseeable, external to the parties of the contract, and unavoidable (irresistible). These concepts are defined and applied differently by different jurisdictions.

The concept of force majeure originated in French civil law and is an accepted standard in many jurisdictions that derive their legal systems from the Napoleonic Code. In common law systems such as the U.S. and the U.K., force majeure clauses are acceptable, but must be more explicit about the events that would trigger the clause.

The International Chamber of Commerce has attempted to clarify the meaning of force majeure (though force majeure is not included in Incoterms​) by applying a standard of "impracticability," meaning that it would be—if not necessarily impossible—unreasonably burdensome and expensive to carry out the terms of the contract. The event that brings this situation about must be external to both parties, unforeseeable and unavoidable. It can be very difficult to prove these conditions, however, and most force majeure defenses fail in international tribunals.

In any jurisdiction, contracts containing specific definitions what of constitutes force majeure—ones that respond to local threats—will hold up better under scrutiny. Even in systems based on civil law, the application of the concept can be strictly limited. For example, say an avalanche destroys a supplier's factory in the French Alps, causing long shipment delays and leading the client to sue for damages. The supplier might employ a force majeure defense, arguing that the avalanche was an unforeseeable, external and irresistible event (the three tests applied by French law). Unless the contract specifically named an avalanche as removing the supplier's liability, the court may well decide that the supplier owes damages: French courts have deemed an event "foreseeable" because a similar event had occurred half a century before. Similarly, a war in a conflict-ridden zone might not be "unforeseeable"; nor might currency controls in struggling economy or a flood in a frequently-affected area. 

In general, force majeure is in tension with the concept of "pacta sunt servanda" (agreements must be kept), a key concept in civil and international law with analogs in common law. It is not supposed to be easy to escape contractual liability, and proving that events were unforeseeable, for example, is onerous by design.

As time goes on, we are becoming aware of new threats, such as solar flares, asteroids and super-volcanoes. We are also developing new threats, or aware that someone might be, such as cyber, nuclear and biological warfare capabilities. These have raised questions about the what is and is not "foreseeable" in a legal sense. We are also becoming increasingly aware of human agency in events that have generally been considered "external" or "acts of God," such as certain seismic activities. Ongoing litigation is exploring questions of whether drilling and construction projects contributed the very natural disasters that rendered them unworkable. In short, the concepts that underpin force majeure are shifting.

RELATED TERMS
  1. Drought Sale

    When a farmer is forced to sell more animals than in a typical ...
  2. Hazard Insurance

    Insurance that protects a property owner against damage caused ...
  3. International Foreign Exchange ...

    An agreement set forth by the Foreign Exchange Committee that ...
  4. Act Of God Bond

    A bond issued by an insurance company, linking principal and ...
  5. Catastrophe Bond - CAT

    A high-yield debt instrument that is usually insurance linked ...
  6. Tight Monetary Policy

    A course of action undertaken by the Federal Reserve to constrict ...
Related Articles
  1. Insurance

    What is a Force Majeure?

    A force majeure clause frees both parties in a contract from fulfilling their obligations in the event of some catastrophic or unexpected occurrence.
  2. Mutual Funds & ETFs

    The Bond Market: A Look Back

    Find out how fixed-income investments evolved in the past century and what it means today.
  3. Insurance

    Event-Linked Bonds: Competing Against A Catastrophe

    These debt instruments can blow new wind into your portfolio, but only if you can handle the risk.
  4. Entrepreneurship

    8 Ways To Survive A Market Downturn

    Stay calm, play dead and keep your eyes open for attractive valuations.
  5. Options & Futures

    20 Investments You Should Know

    To take advantage of all your investing options, you need to know what your choices are. Here we tell you about the diverse features and advantages of 20 different financial instruments.
  6. Economics

    The Delicate Dance of Inflation and GDP

    Investors must understand inflation and gross domestic product, or GDP, well enough to make decisions without becoming buried in data.
  7. Economics

    Industries That Thrive On Recession

    Recessions are not equally hard on everyone. In fact, there are some industries that even flourish amid the adversity.
  8. Investing

    How Rising Interest Rates Affect Junk Bonds

    We examine the impact of rising interest rates on higher-yielding bonds.
  9. Mutual Funds & ETFs

    The 4 Best Fidelity Funds for Income Seekers in 2016

    Discover the four best fixed-income mutual funds administered and managed by Fidelity Investments suitable for income-seeking investors.
  10. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
RELATED FAQS
  1. What is a "force majeure"?

    A force majeure is derived from the French term meaning "greater force" and refers to any natural and unavoidable catastrophe. ... Read Full Answer >>
  2. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >>
  3. How does the Wall Street Journal prime rate forecast work?

    The prime rate forecast is also known as the consensus prime rate, or the average prime rate defined by the Wall Street Journal ... Read Full Answer >>
  4. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  5. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  6. What are the maximum Social Security disability benefits?

    The average Social Security disability benefit amount for a recipient of Social Security Disability Insurance (SSDI) in 2 ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center