Force majeure, in the context of finance, refers to a contractual provision that excuses a party from fulfilling its obligations under a contract due to unforeseen and uncontrollable events beyond their control. These events are typically considered to be extraordinary circumstances that are not reasonably foreseeable or preventable by the parties involved. Force majeure clauses are included in contracts to allocate the risk
of such events between the parties and provide a mechanism for addressing the impact of these events on the performance of the contract.
The term "force majeure" is derived from French civil law and translates to "superior force" or "greater force." It is also commonly referred to as an "act of God" clause. The purpose of including a force majeure clause in a contract is to protect the parties from liability
or penalties when performance becomes impossible or impracticable due to events outside their control.
In the finance context, force majeure events can encompass a wide range of occurrences, including natural disasters (such as earthquakes, hurricanes, floods), acts of terrorism, war, government actions (such as changes in regulations or imposition of sanctions), labor strikes, epidemics or pandemics (such as the COVID-19 outbreak), and other unforeseen events that significantly disrupt normal business
To invoke force majeure, the party seeking relief must demonstrate that the event meets the criteria specified in the contract. These criteria typically include the event being beyond the reasonable control of the affected party, rendering performance impossible or commercially impracticable, and not resulting from the party's own fault or negligence. The affected party is usually required to provide notice to the other party promptly and take reasonable steps to mitigate the impact of the force majeure event.
The consequences of a force majeure event vary depending on the specific terms of the contract. In some cases, the force majeure clause may suspend performance temporarily until the event subsides, while in others, it may provide for termination of the contract without liability. Some contracts may also include provisions for renegotiation of terms or alternative methods of performance in the event of force majeure.
It is important to note that force majeure clauses are subject to interpretation and may vary in their wording and scope from one contract to another. The specific events covered, the notice requirements, and the remedies available will depend on the negotiations and drafting of the contract. Therefore, it is crucial for parties to carefully review and negotiate force majeure clauses to ensure they adequately address the risks associated with unforeseen events that could impact the financial performance of the contract.
In summary, force majeure in the context of finance refers to a contractual provision that excuses a party from fulfilling its obligations due to unforeseen and uncontrollable events beyond their control. These clauses allocate the risk of such events and provide a mechanism for addressing their impact on contract performance. The specific events covered and the consequences of invoking force majeure will depend on the terms negotiated in the contract.