force majeure

A contract clause that frees parties from liability or obligation when an extraordinary, unavoidable event occurs.

A force majeure clause is a standard contractual provision that excuses one or both parties from performing their legal obligations when extraordinary, unavoidable events occur. These events are typically defined as circumstances beyond human control, such as natural disasters (acts of God), wars, strikes, epidemics, or sudden government restrictions. The clause prevents a party from being sued for breach of contract when performance becomes physically or legally impossible. For investors, a company invoking force majeure is a significant warning sign. It typically signals immediate operational disruptions, project delays, or supply chain failures that can damage upcoming quarterly revenue and earnings. Conversely, if a key supplier or customer of a company invokes force majeure, it can trigger unexpected inventory shortages or sudden cancellations of expected contract revenue. When evaluating companies in sectors highly exposed to physical and geopolitical risks—such as energy, shipping, and manufacturing—investors should review how tightly these clauses are drafted. Broadly defined clauses give companies more leeway to escape obligations during crises, whereas narrowly defined clauses offer stronger protections to the counterparty. A common pitfall is assuming that general economic downturns or price spikes qualify as force majeure; courts rarely excuse performance based solely on unprofitable market conditions.

An oil drilling company is contracted to deliver 100,000 barrels of oil to a refinery. A major hurricane damages the extraction facility, forcing a complete shutdown. Because the contract contains a force majeure clause specifically listing hurricanes, the drilling company legally suspends deliveries without facing financial penalties for breach of contract, though it loses the revenue from those undelivered barrels.