If you are familiar with the insurance industry, you may have heard the term “force majeure” before. You might wonder why people are suddenly speaking French! That’s because it originated from French law. Oddly enough, it’s a common term used among people in the insurance industry across the world. It’s commonplace in international law and is used to describe a type of insurable event.
However, unless you’ve experienced a force majeure event, you probably don’t know what it means. That’s why we’ll explain force majeure in this article. Additionally, we will discuss how it relates to insurance and whether you need to worry about it.
Defining force majeure
Force majeure is an event that is beyond your control. It includes natural disasters, civil unrest, and any other unforeseen event that could harm you or your property. Force majeure translates to “superior force.” Other times, it’s referred to as an “act of God.”
A force majeure clause can be included in a contract. If one of the parties in the contract is unable to execute their responsibilities because of extraordinary or extreme circumstances, the force majeure clause can allow them to be released from liability.
When force majeure comes into effect
To be considered a force majeure, an event must be unpredictable. Force majeure means superior force and is known as an act of God. In other words, no one can be held directly accountable. The definition will vary depending on where you live.
Let’s provide an example. If an avalanche destroys a factory in the French Alps, the company will face long shipping delays and may even sue for damages. A force majeure defence can be used in court because an avalanche can be called unforeseeable, external, and unavoidable. This meets the three tests used by French law. However, there is one important thing to note. The supplier may have to pay for the damages if the contract doesn’t explicitly list an avalanche as a hazard.
As mentioned earlier, force majeure came about from French civil law. Despite this, many legal systems utilize it in their legal systems. Common law systems such as Canada, the United States and the United Kingdom accept force majeure clauses as a defence. However, only certain events can cause the clause to come into effect.
Effects of a force majeure clause on a contract
Including a force majeure clause in your contract can make a difference, especially when an event prevents you and your team from fulfilling contractual obligations. That’s why it’s important to understand the impact a claim of irresistible force can have on a contract. Here’s what you need to know:
Stops you from continuing to fulfill contractual obligations
When adding a force majeure clause to your contract, you have to be careful with the language you use. Although it’s implied that an irresistible force stops you from getting your work done, you should be aware of how you word it. In most cases, a force majeure event only allows you to change the deadlines of potential deliverables. Ensure there’s room for negotiations because severe events like natural disasters can have lasting effects on a business.
Reduces risks
Adding a force majeure clause to your contract takes a lot of planning. However, by listing the correct events on your contract, you can reduce the risk of losing money due to unexpected events like natural disasters. In turn, it becomes much easier to add it to your insurance policy. For example, if you live in an area prone to earthquakes, you can mitigate the amount of risk you take as a party unable to fulfill your contractual obligations.
Assists with planning
It’s never a bad idea to plan ahead, and having a force majeure clause in your contract is a great way to do so. It allows you to identify potential risks before they wreak havoc on your business and cause significant financial losses. Additionally, you can plan ahead for these events to avoid losing everything. Preventative measures may seem redundant at first, but having them can potentially prevent the damaging effects of natural events.
Allows teams to work together
It takes a team to manage risks effectively. The addition of a force majeure clause can help teams work together through collaboration and open communication. Regularly updating policies to identify risks will foster a sense of camaraderie and ensure a contingency plan is in place. After all, using a force majeure defence in court is often a long, drawn-out process.
Understanding force majeure events will help you understand what to do if you need to make a claim. It will also help you escape contractual liability if you are unable to perform your duties. In turn, you can learn about the effects it can have when you include it in your contract. However, a force majeure defence can be used in a variety of industries. It can particularly help you when making an insurance claim, but there are limitations, which we will discuss shortly.
How force majeure applies to insurance
In Canada, your personal insurance broker probably won’t mention force majeure or acts of God. However, your insurance policy will still tell you what’s covered and what’s not. If you are unsure about any part of your coverage, ask your insurance broker for clarification. Depending on the type of insurance coverage you have, you could be covered for things like:
- Fire
- Smoke damage
- Theft
- Weather damage
- Water damage
However, your insurance company might not cover everything. Extreme circumstances that aren’t as common might be covered and include:
- War
- Nuclear bomb
- Zombie attack
- Sanctions from a foreign government
The majority of Canadians have home and auto insurance. If this is the case, you don’t need to be concerned about force majeure. All you have to do is read your insurance documents to fully understand what is and isn’t covered by your policy. If you have any questions, your insurance broker will be happy to answer them. We will explore how the force majeure clause affects your home and car insurance policy below:
The force majeure clause in your home insurance policy
A typical home insurance policy can cover unexpected events such as fire, damage from the weather, theft of belongings, or burst pipes. However, if an incredibly unlikely event causes damage to your home, such as aliens invading Earth and using your home as a nightclub, your insurance company might not cover it. Carefully review your policy and talk to your broker to determine the events to which your home insurance applies.
The force majeure clause in your car insurance policy
The majority of car insurance policies cover various situations like fender benders, more serious accidents, vandalism and theft. You will also receive coverage in the event of a lawsuit and will receive compensation to pay for medical bills that accumulate as a result of a car accident. If an extremely unlikely event occurs and damages your car, your insurance company might not provide coverage. For example, suppose your car develops a mind of its own, like the flying car in Harry Potter and disappears into the Forbidden Forest. In that case, your insurance company might not provide coverage. Read your car insurance policy carefully to determine the extent of your coverage, and speak with your insurance broker if you have any questions.
The insurance industry is often unpredictable. Because of this, you have to understand what’s included in your coverage before making a claim. A force majeure has to be listed on your policy in order for you to get coverage. If there isn’t a specific mention of a scenario, you may have to pay out of pocket for any damages caused by an unforeseeable event, which can add up quickly. That’s why you need lots of proof if you decide to take legal action, which we will get into next.
Providing proof of a force majeure event
In order to win a court case on the grounds of a force majeure clause, you have to provide proof that what happened is indeed a force majeure. In other words, you have to do the following:
- Show the event that occurred prevented, hindered or delayed you from fulfilling your contractual obligations
- Explain the event was unforeseeable and beyond your control
- Demonstrate there weren’t any reasonable steps you could’ve taken to prevent or avoid the consequences of the event
Prevent is a rather vague term. That’s why showing that you couldn’t do anything to stop what happened is essential. Sometimes, this isn’t easy. For a force majeure clause to be accepted, you have to show that it wasn’t legally or physically possible to stop what happened. The excuse of the damages being more expensive than you thought isn’t viable under the law.
Force majeure litigation process
When a party uses force majeure as a defence, there is often a lengthy litigation process. The court will ask for proof that the event was beyond reasonable control. This is especially true for cases that use the term because what happened doesn’t fall into any other category.
The litigation process doesn’t have to be listed on the contract. Even in places where common law is the norm, the party will still have to prove the event was a force majeure. This includes showing that the circumstances did not let the parties perform any additional steps to fulfill their obligations. The event must warrant a risk large enough to prevent any task related to the contract from being completed.
Consequences of using a force majeure clause as a defence
Although it can take on a slightly different meaning depending on where you live, using a force majeure clause as a defence isn’t without its flaws. If such events are accepted, parties are not allowed to continue fulfilling their contractual obligations until the relevant event has run its course. It maintains control of the parties and doesn’t let them escape contractual liability if the event beyond their control has lasting effects.
In the majority of cases, if an event beyond reasonable control occurs, the force majeure clause has to remain in effect for a certain amount of time. This can range from six to 12 months. Even if the event is beyond the control of the parties has concluded, they still must serve this waiting period.
When events beyond the control of the parties occur, they should remember the obligations outlined in the contract. Even if the contract ends, it may need to be extended as a result of the force majeure event.
It’s often difficult to prove a force majeure event, so you need to be thorough when presenting your case. Even if you do prove a force majeure event occurred, there are consequences, such as long waiting periods and having to extend your contract anyway. Despite this, having a clause is worth it to avoid the expensive fees that come with a breach of contract. In the following section, we will discuss why you should have a force majeure clause in your contract.
Why you should have a force majeure clause
Common law contracts have limited exceptions. In other words, it’s up to the two parties in a relationship to decide what’s included in their contracts. On a positive note, this gives everyone the freedom to do what they feel is necessary to their contracts to prevent legal systems from altering them. This is different from contracts that are created under the laws of civil law jurisdictions.
It also allows parties to “future proof” their contract if circumstances change later on, which includes force majeure clauses. If these clauses are not included right away, there isn’t much someone can do to fight back in a court case. The only exception is called a doctrine of frustration, which relieves the parties of their obligations outlined in the contract if it can be called frustrated. This only occurs in rare cases and shouldn’t be relied on when attempting to breach a contract.
That’s why adding a force majeure clause is preferable. It allows parties to use an unforeseeable event as an excuse for not fulfilling their contractual obligations.
Force majeure clauses are a prominent part of international law, and they certainly have their perks. Having at least one in place will save you money in the long run because it prevents you from having to pay certain types of damages out of pocket. Without it, you can suffer significant financial losses. With that said, we will explore what happens if you don’t have a force majeure clause in your contract shortly.
If you don’t have a force majeure clause in your contract
If a force majeure event occurs and you don’t have a clause in your contract, you’ll have to find alternative ways to resolve your dispute. The most common methods used are negotiation and taking legal action. Let’s review each option with examples to help you understand what to do if you encounter a force majeure event:
Negotiation
In the event that an earthquake destroys a construction site, everyone can agree that the event was beyond the control of the workers. As a result, the crew may want to adjust their contract by adding a new project completion date. In this case, negotiation is possible. This can be done with a mediator to help both parties come to an agreement.
Legal action
Sometimes, parties must cancel a contract if they cannot fulfill the obligations in a reasonable amount of time. Certain contracts have consequences for ending them early. For example, a freelance writer might ask clients to pay a cancellation fee if the contract ends earlier than expected. If there isn’t a contractual liability clause, the matter will likely have to be settled in court.
Sometimes, even without a force majeure, parties can renegotiate their contracts without legal intervention. However, if the parties can’t make a decision, they will have to go to court to figure out a solution. The fact is force majeure events are unpredictable, and without a clause in your contract, you can suffer significant financial losses. Next, we will discuss the frustration of contract, which can be a great alternative if you don’t include force majeure events in your contract.
How frustration of contract acts as an alternative to superior force
If a contract does not include a force majeure clause, frustration of contract might act as a reasonable alternative. Also known as the common law doctrine of frustration, it allows parties to have a defence for not fulfilling their contractual obligations when force majeure clauses cannot come into effect.
The common law doctrine of frustration is an effective way to justify not being able to fulfill contractual obligations. In other words, natural events that hinder the performance of duties prevent people from being held accountable for their duties and tasks.
The basis of this claim originates from unforeseeable events stopping a party from getting their job done. An example is a company not being able to send materials to restaurants as a result of the federal or provincial governments closing down non-essential businesses during the Covid 19 pandemic.
However, it’s important to note that the frustration doctrine is rarely used in Canadian courts like its force majeure counterpart. Because of this, it will not come into effect if an event disrupts operations but doesn’t completely disable parties from completing their tasks.
To be clear, frustration of a contract has to meet certain conditions to come into effect. Although the definition might seem like it varies, under the law, a frustrating event has to meet the following requirements:
- An event that happens after the contract term begins
- Render performance impossible, illegal or completely different from the way the parties agreed upon them
- Does not happen because of the party’s deliberate actions
- Fault does not fall on the contracting parties
- Is not anticipated by the parties
Frustration of contract can act as an alternative to force majeure in the sense that it provides more flexibility. It isn’t as specific as force majeure, which makes it easier to use as a line of defence if your case goes to litigation. Despite this, you should still be careful because you can extend your contract rather than cancel it if there’s an alternative way to fulfill your contractual obligations. That’s why we provide other ways to address unforeseeable events in the following section.
Other ways to address unforeseeable events without a force majeure clause
There are other ways to protect your business and your interests when drawing up a contract. To be classified as force majeure, an event must meet certain criteria. However, you don’t know when certain things will occur. As a result, paying out of pocket might be the only option if mitigation won’t resolve the issue. Luckily, there are other ways to receive coverage for such events, which we get into below:
Hardship clauses
When fulfilling contractual obligations becomes too difficult because of the work itself or financial repercussions, hardship clauses can help you out. These clauses specifically focus on events that make performance impossible rather than unforeseeable circumstances. There is much more flexibility in terms of what makes completing a task more difficult.
Tailored provisions
Tailored provisions are clauses that you can customize based on your industry. For example, if you work in construction, shipping services, or live event performances, you can add risks specific to this line of work to your contract. The clauses could include alternative interventions, emergency protocols, and ways to handle disputes.
Force majeure clauses can help you navigate the consequences of unexpected events, such as natural disasters. Force majeure originated from French civil law and is still used today, but not on a regular basis. That’s why it’s important to be willing to negotiate before taking legal action. Without the proper clauses in your contract, you may run into issues. However, with the right wording, you can get compensated if you are unable to fulfill your duties as a result of a natural disaster or another event.
Talk to BrokerLink insurance today!
Insurance exists to protect you and your assets. Reputable insurance companies want to help you if you have to make a claim. However, certain events won’t be covered depending on your policy. That’s why it’s important to review your insurance documents and understand the limitations of your policy — it will help avoid any surprises.
Do you still have questions about force majeure and insurance? Give us a call! Our brokers are experts in all things insurance and would be happy to answer your questions. You can give us a call, find us online, or visit one of our community branches.
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