Force Majeure 6th JUN 2010

8/9/2019 Force Majeure 6th JUN 2010

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Riskope International SA 2010 www.riskope.comRiskope's blog

Force Majeure Clause in Contracts

A time bomb?

By F. Oboni & C. Oboni

Riskope
http://www.riskope.com/http://foboni.wordpress.com/http://foboni.wordpress.com/http://www.riskope.com/


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Force Majeure clauses are now well established asboilerplate clauses, essential to the mechanics ofcommercial contracts.

FM literal meaning is superior force, denoting an

influence that is not capable of being controlled.

The Messina earthquake andtsunami took as many as 200,000

lives on December 28, 1908 in Sicilyand Calabria.


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FM has been passed down from the common lawcourts of England, and hasnt really changed

significantly in a very long time despite the radicalchanges in the world.

The Elie, Manitoba Tornado ofJune 22, 2007 was the firsttornado in Canadian history tocause F5 damage.(261-318 mph)


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For example, delays due to breakdowns in

machinery did qualify as a FM events, while badweather, football matches and a funeral did not.

Geneva January 2005freak ice storm...a firstin records event


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1999 Salt Lake City First

known casualty in a UtahTornado

Some homeowners insurance policy state that wind

shear is an act of nature but a tornado is an Act of

God and is not covered.

How are climate changes related events going tobe considered?


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Modern FM include a non-exhaustive list of

events so as to ensure that anycircumstances not mentioned can be arguedto be included. Importantly, the ejusdemgenerisrule does not apply to FM i.e.

specifying events does not cut down themeaning of any general words that follow.


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Clearly whether events such as riots and strikescome within the definition is debatable...whatabout new risks such as IW, MP etc.?

Although paradoxical it seems that future risksmight be more easily dealt than usual risks.


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Perhaps theSupreme Court

pornographyexplanation: it isdifficult to define,

but I know it when Isee itshould beused for FM!

Despite the generalized use of FM clauses, Courtshave struggled to define what FM means as

statements leave major room for interpretation.


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The party intending to rely on FM must establish

that the event in question was beyond their control;

and that there were no further steps the partycould have taken to avoid or mitigate theconsequences.

FM allows a party to terminate a contract underextreme circumstances, usually when performancebecomes impossible or impracticable.


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The more difficult cases arise when one party

to the contract claims performance isimpossible, while the other maintains thatperformance is possible, but just at a greater

expense to the other party.

Attempts have been made to increase FMscope for commercial advantage.


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Donald Trump has argued that the currentfinancial crisis qualifies as a FM event. This wouldexcuse him making payments on a real estateloan.

Trump, Donald et al. v- Deutsche Bank Trust et al., New YorkSupreme Court, Queens, 026841/2008.

The case raises interesting questions over the

scope of FM during periods of national and/orinternational crises of various origin.


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Economists and financial experts seem indeed

to dare say that a phenomenon that happens

(with a range of magnitudes)

seventeeen times in two hundred years, and

happened with very significant magnitude

seventy years ago and again in 2008-2009 is...

.... unforeseeable??!!

they have even invented a nice wording for it.a

black swan!!


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What many Industries seem to adopt as a

rule:

a Maximum Credible Event has a probability

between 1/100,000 and 1/1,000,000.

Anything below those values would be not

credible, thus an Act of God.


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Let's Consider Climate ChangesRelated Events as an Example


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Force Majeure a contractual Time bomb!

What would happen if more than 25 occurrencesin 48 years got declared normal ?


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With hurricane activity in the Gulf Coast athigher than historical levelsin 10 of the past 12 years,

and with forecasters able to predicthurricanes several days in advance, the

position that a hurricane in the region is an

unforeseen circumstance may bechallenged.


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#a#c#k#a#g#e#_#s#t#r#e#a#m###But shouldn't we define what type ofHurricane we are talking about?

By defining, for example, limiting values ofthe Hurricanes and their limiting frequency,

we would have a way stronger FM clause.


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How to perform that task ?

Proper hazards identification and scenariosdefinition

Quantification of limiting valuesNegotiations based on risk tolerability of

both parties

Win-win B2B strategies


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Optimization will take the form of:

-more detailed explanation of terms,-definition ofthreshold values (quantified),

-definition of mitigative levels to beconsidered common practices or bestpractices,-definition ofnegligence,-limiting value of Force Majeure.


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The optimization of Force Majeure formulation

constitutes an important proactive mitigativemeasure with very large potential ROI (Return

On Investment).

It will reduce discussions and litigation in theaftermath of an uncommon event, which isequivalent to sparing time, or reduce the

impact of the mishap.


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Contact Riskope to discuss how we cansupport you in optimizing your next contract's

Force Majeure clause.

[email protected]
http://www.riskope.com/http://foboni.wordpress.com/mailto:[email protected]:[email protected]://foboni.wordpress.com/http://www.riskope.com/

Force Majeure 6th JUN 2010

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