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