FORCE MAJEURE CLAUSES
(AND A FEW OTHERS)….“THE LOST CLAUSES”“THE LOST CLAUSES”
YOU HAVE ONE SHOT, MAKE IT COUNT
THE LAST GASP OF THE TRULY DESPERATE
WHAT WERE WE THINKING?
Stephen B. Crain, Partner
December 2012
THE LOST CLAUSES
LITTLE OR NO THOUGHT: BIG (HUGE) CONSEQUENCES
●●●●●●●● Force Majeure
●●●● Damage Limitations
●●●● Dispute Resolution
●●●● A Few Others (Time Permitting)
FM: BIG PICTURE CONCEPTS
FORCE MAJEURE CLAUSES ARE DESIGNEDTO –
●●●● Expect the Unexpected●●●● Expect the Unexpected
●●●● Allocate Risk
●●●● Change Obligations
●●●● Offer An Out (or a Suspension)
FORCE MAJEURE 101FORCE MAJEURE CLAUSES COMMONLY SHARE
MOST TRAITS
An event or cause reasonably beyond the control of
the party claiming force majeurethe party claiming force majeure
●●●● Natural Disasters
●●●● Fires
●●●● Labor Issues
●●●● Riot, War, Mayhem
●●●● Governmental Action*
AND: Reasonable diligence to avoid or mitigate the
event
FM 101: MACONDO JOA
An event or cause reasonably beyond the control of the party
claiming force majeureclaiming force majeure
THE OBVIOUS*: Storms, Wars, Fires, Riots, and Strikes
●●●● BUT, what is "beyond control"?
THE DEBATED:
●●●● An inability to immediately comply with a law, order, rule,
or regulation
●●●● A governmental action or delay in granting necessary
permits or permit approvals
●●●● The inability to secure materials or a rig
OK, SO WHAT? (Part 1)
SUSPEND
FORCE
MAJEURE
TERMINATE
OK, SO WHAT? (Part 2)WHAT CONDUCT GETS SUSPENDED OR TERMINATED?
●●●● Performance?
BUT: what if the purpose of the contract is defined
broadly? Has "the purpose of the contact" been frustrated?broadly? Has "the purpose of the contact" been frustrated?
●●●● Payment?
AND, IN THE CASE OF SUSPENSION, FOR HOW LONG?
●●●● Until the event ends? Who decides?
●●●● Illustration: The GOM Moratorium
AND, WHO ELSE CAN RELY ON THE EVENT?
APRIL 20, 2010
DID MACONDO CHANGE THE WORLD?
●●●● Maybe. We’re continuing to see.
BUT ALSO: 9/11, Ivan, Katrina, Rita, Ike
●●●● Has it changed how we draft?
●●●● Has it changed how we practice?
WHAT'S PAST IS PROLOGUE
LESSONS FROM OTHER FM "EVENTS" AND CASES
●●●● 9/11 and runways
●●●● Prudhoe Bay ●●●● Prudhoe Bay
●●●● The routine use of FM to negotiate or excuse
delays or extensions ("factual" v. "legal" bases)
●●●● Commercial Impracticability: What does unable
to perform mean?
A REAL WORLD EXAMPLE TO
HIGHLIGHT COMPLEXITIES:
THE MACONDO DRILLING CONTRACT
MACONDO DRILLING CONTRACT
THE USUAL SUSPECTS: Wind, Earthquakes, War, Strikes*
THE SPECIFIC:
●●●● Governmentally imposed rules, regulations or moratoriums
THE CATCH-ALL (TO END ALL CATCH-ALLS):
●●●● "any other cause whatsoever… not within the reasonable
control of either Party which, through the exercise of due
diligence said party is unable to foresee or overcome."
MACONDO DRILLING CONTRACT
FORCE MAJEURE IS NOT…
DELAYS OR EVENTS CAUSED BY CONTRACTOR*
●●●● "normal"
●●●● "reasonably foreseeable"
●●●● "reasonably avoidable"
*HIGHLIGHTS BUY SIDE/SELL SIDE CONFLICT
'When I use a word,' Humpty Dumpty said, in rather a scornful tone, 'it means just what I choose it to mean -- neither more nor less.' choose it to mean -- neither more nor less.'
'The question is,' said Alice, 'whether you can make words mean so many different things.'
'The question is,' said Humpty Dumpty, 'which is to be master -- that's all.'
Lewis Carroll, Through the Looking Glass
MACONDO DRILLING CONTRACT
WHEN FORCE MAJEURE EVENT OCCURS –
●●●● "In the event that either Party hereto is
rendered unable, wholly or in part, by
Force Majeure to carry out its obligations
under this CONTRACT …"
MACONDO DRILLING CONTRACT
WHEN FORCE MAJEURE EVENT OCCURS –
●●●● Notice
●●●● Performance suspended
("during continuance of any inability so caused")
●●●● Payment
●●●● Termination (by Company)
WHAT NOW?FORM FORCE MAJEURE CLAUSES SHOULD BE DEAD
●●●● Courts and arbitrators will refine issues for existing contracts
●●●● Renewed specificity in contracts: risks identified and allocated
(the unanticipated becomes more specifically “unanticipatedly”(the unanticipated becomes more specifically “unanticipatedly”
anticipated)
●●●● New, vigorous drafting fights over effects of FM and parties'
obligations to overcome events
●●●● Commercial impracticability ("economic out") resolved by
contract
BUT, ALWAYS: Market forces push contract terms
DRAFTING: ONE SIZES FITS NONE●●●● General or specific
●●●● What are your actual risks?
●●●● What threatens performance and who bears risk?
●●●● Who regulates conduct?●●●● Who regulates conduct?
●●●● Financial redress: Liquidated damages? Continued payment?
●●●● Termination or suspension or both?
●●●● Obligations to overcome/mitigate
●●●● Economic outs (“Price Majeure”)
●●●● Impact on other obligations
NEXT: DAMAGE LIMITATIONS
●●●● Thoughtless wholesale elimination of categories of
damages
●●●● Complete lack of understanding of types of damages
●●●● Feeling safe when should be feeling stupid
●●●● Undoing protections by not watching other clauses
●●●● Ignoring economics of transaction (the actual basis
of the bargain)
DAMAGE LIMITATIONSCompensatory
Actual
Direct
Special
Exemplary
PunitiveDirect
Indirect
Incidental
Nominal
Liquidated
Punitive
Consequential
Extraordinary
Rescission/Restitution
Specific Performance
DAMAGE LIMITATIONS
“[N]either in Michigan nor elsewhere does the term
‘consequential damages’ have a clearly established
meaning.”
Applied Data Processing, Inc. v. Burroughs Corp., 394
F. Supp. 504, 508 (D. Conn. 1975)
DAMAGE LIMITATIONS
DAMAGE LIMITATIONS●●●● CONTRACT DAMAGES MUST BE FORESEEABLE*
●●●● Losses sustained by a non-breaching party for which damages are awarded
against the breaching party, including “consequential damages,” generally must
be “the natural, probable and reasonably foreseeable [or within the contemplation
of the parties as a] consequence of the [breach].”
●●●● Lost profits ARE NOT ALWAYS consequential (or “special”) damages
●●●● Incidental damages are just that: incidental to a breach
●●●● Punitive (or “exemplary” or “extraordinary”) damages are not contract
damages*
●●●● “Direct (or “general”) damages means those damages which naturally and
necessarily flow from a wrongful act, are so usual an accompaniment of the kind
of breach alleged that the mere allegation of the breach gives sufficient notice,
and are conclusively presumed to have been foreseen or contemplated by the
party as a consequence of his breach”
DAMAGE LIMITATIONS
IT’S STILL A HADLEY v. BAXENDALE KIND OF
WORLD
The two branches of Hadley: Direct Damages and Consequential Damages
●●●● Direct damages are “those which may fairly and reasonably be ●●●● Direct damages are “those which may fairly and reasonably be
considered as arising naturally from the breach” of any similar contract (as
said in Hadley, “in the great multitude of such cases”) and which do not
arise from any special circumstances applicable to the non-breaching party
and
●●●● Consequential damages are “those damages which, though they do not
always or even usually flow from the breach of contract, are, at the time of
making the contract, recognized by the parties as those which in the
particular case may result from a breach”
DAMAGE LIMITATIONS
IT’S STILL A HADLEY v. BAXENDALE KIND OF
WORLD
The distinction between [direct] and [consequential] damages
is not that one is and the other is not the direct and proximate is not that one is and the other is not the direct and proximate
consequence of the breach complained of, but that general
[or direct] damages are such as naturally and ordinarily follow
the breach, whereas special [or consequential] damages are
those that ensue, not necessarily or ordinarily, but because of
special circumstances.
Applied Data Processing, Inc. v. Burroughs Corp., 394 F. Supp. 504, 509 (D. Conn. 1975)
DAMAGE LIMITATIONS
WHY DOES THIS MATTER? I ALWAYS ALWAYS ALWAYS
EXCLUDE CONSEQUENTIAL DAMAGES!!!
●●●● Consequential damages waivers protect me from lost profits claims!
BUT: “the great multitude of” similar circumstances
●●●● I am not giving up much by waiving consequential damages!
WELL, MAYBE: But what is the basis of the bargain?
●●●● I exclude consequential damages and lost profits from every contract!
HUH?: What are you buying?
DAMAGE LIMITATIONS
DAMAGE LIMITATIONS
DAMAGE LIMITATIONS
Neither party shall be liable to the other for consequential
damages or lost profits. Any recovery under this contract
shall be limited to the parties’ direct damages.
DAMAGE LIMITATIONS
FINAL THOUGHTS
●●●● Make sure you are getting what you want (remember the basis of
the bargain)
●●●●●●●● Make sure the words you use match the assurances you want
●●●● Never assume that consequential damages excludes damages just
because they are not “cost to replace” damages
●●●● Pay attention to the indemnity language: conflicts between
indemnifying for “all losses” and damage waiver
●●●● Rescission/Restitution/Specific Performance are equitable
remedies that exist outside the damage waiver (unless put inside)
DAMAGE LIMITATIONS
NO KIDDING, FINAL THOUGHT
DISPUTE RESOLUTION
COMMON TREATMENTS
●●●● Silence
●●●● Trial in specific jurisdiction
●●●● Waiver of jury trial
●●●● Arbitration
DISPUTE RESOLUTION
DISPUTE RESOLUTION
●●●● Speed?
●●●●●●●● Costs?
●●●● Limits on discovery?
●●●● No appeal!
DISPUTE RESOLUTION
DISPUTE RESOLUTION
X,
Y,
DISPUTE RESOLUTION
ARBITRATION CLAUSES: Get What You Want
●●●● General or “Broad” v. Specific Clauses
“arising under or connection with” or “arising under”
●●●● Timing needs to make sense for the contract at issue
●●●● Resolve who resolves “arbitrability”
DISPUTE RESOLUTION
●●●● Resolve who resolves “arbitrability”
●●●● Deal with extraordinary relief
●●●● Discovery needs to make sense for the likely disputes
●●●● Who pays (and how can you predict if that helps)
●●●● What law applies to which disputes (multi-jurisdictional contracts)
●●●● If you want an expert fact-finder, say so (but reasonably)
●●●● Leave arbitrator some discretion
●●●● Accept the lack of appellate oversight
FORCE MAJEURE CLAUSES
(AND A FEW OTHERS)….“THE LOST CLAUSES”“THE LOST CLAUSES”
YOU HAVE ONE SHOT, MAKE IT COUNT
THE LAST GASP OF THE TRULY DESPERATE
WHAT WERE WE THINKING?
Stephen B. Crain, Partner
December 2012