March 2, 2017
What is Force Majeure?
The Force Majeure clause is often found in logistics contracts but do you know what it means and how it can affect your business? This clause removes the legal liability to fulfill contractual obligations if an unforeseen and unavoidable event occurs and hinders participants from their fulfillment.
What is Force Majeure?
Force Majeure comes from a French term meaning “a greater or superior force”. It must be an extraordinary event that is outside the control of either contract parties. It may include natural events (“acts of God”), such as hurricane, flood, or earthquake, or acts of people, such as war or civil disturbance. But that’s not the only qualification for Force Majeure. Generally, for an event to be considered Force Majeure, it needs to meet certain qualifications:
- It was unforeseen. Hurricanes in a coastal areas and earthquakes in areas with seismic activity may not count.
- The event was unavoidable and there were no reasonable alternatives. If a hurricane was expected and the shipment could have been rerouted to a different port, it is not Force Majeure.
- It truly and directly hindered the performance of the obligation. If there was any way a diligent party could have still reasonably fulfilled the obligation, it is not Force Majeure.
- The event is external (or outside the control) of the parties to the contract.
It is also important to note that different jurisdictions may apply these concepts differently.
Are there added cost?
You may think that insurance will fully cover you when shipping cargo. However, cargo insurance is often only for the physical loss or damage to cargo. A Force Majeure declaration may result in other costs that the cargo owner is responsible for. For example, if a Force Majeure declaration caused a shipment to be rerouted to a different port, there may be unintended consequences.
- There will be additional cost to get the cargo to its final destination. This may include hiring another carrier to transport the cargo from the alternate port.
- Cargo coverage may cease when cargo is taken out of the “due course of transit.”
- Cargo coverage may cease when the cargo is discharged at the alternate port. In this case, it would be uninsured for the rest of the transit.
Even though Force Majeure is commonly found in contracts and it may seem standard, their ramifications can be costly. Make sure you understand what you are signing.
Want to learn more about Force Majeure? Avalon’s RVP, Wanda Sample will provide an in-depth discussion and provide claim examples in an NEI webinar coming up on March 16th. Click here for more information or to register. This course is worth 1CCS/CES credit.