Friday, August 30, 2013

Should Inflation be a Force Majeure Event?

In a recent LinkedIN forum someone asked the question of whether inflation could be a force majeure event. Under freedom of contract the parties could make anything a force majeure event. The real question is whether that would make sense. The underlying concept of force majeure is an event has occurred that is beyond that party’s control where performance is not possible because of that event, and as such performance is excused until the effected party is able to recover from the event. Inflation is not something that stops performance it just makes performance more expensive.

A fairly common force majeure clause may read something like this:
Neither party will be in default or liable for any delay or failure to comply with this Agreement due to any act beyond the control of the affected party, excluding labor disputes, provided such party immediately notifies the other.”

With such a clause the party that sustained the force majeure event is normally allowed to recover from that event. Neither party is excused from completely performing. The party that suffered the force majeure event simply won’t be in default or be liable for performance during the period. The party that did not suffer the force majeure event is not excused from performance so if a payment was due, they would need to make the payment.

Including inflation in a force majeure clause makes no sense. Delaying performance as a result of inflation only makes sense if you are sure that de-inflation will occur. If it that isn’t the case, delaying performance would only cost more, as performance is not excused. A force majeure does not excuse performance, it simply creates a situation where the party that suffers force majeure event isn’t in default of liable during the period performance cannot be provides as a result of the force majeure. Performance can only be excused by certain conditions: subsequently illegality; impossibility of performance; impracticability of performance; frustration; where the parties agree to rescind or stop the agreement; novation; and lapse of the contract term.

Since it makes no sense to have inflation be considered a force majeure event, how do you deal with inflation concerns? One way to deal with inflation is to allow price adjustment per a pre-agreed formula. As an employer you might what to include an upper limit where work could be stopped at a point where it makes it uneconomical for the employer to continue the work. Since performance can be excused by agreement of the parties to stop or rescind the agreement you could include that in advance in your agreement. I would probably write a separate clause where the parties agree in advance that if there is no pre-agreed formula to adjust the price for inflation, either party has the right to rescind or stop the agreement if inflation exceeds a specific rate. Since you would not want the party to use that simply to walk away from a bad deal, I would want advance notice of their intent to exercise that right and make that right conditioned upon the parties not being able to reasonably agree to a adjustment based upon actual inflation. That way if the buyer agrees to make a reasonable adjustment to the price to cover inflation the supplier or contractor can’t use inflation as a way to walk away from a bad deal they made.