What Is a Force Majeure Clause? Sorting Out Contractual Liability for Disasters, System Outages and Infectious Diseases

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

A force majeure clause prepares for events that cannot be controlled through the parties' reasonable efforts alone, such as natural disasters, epidemics of infectious diseases and system outages. Its role is to agree in advance how liability for non-performance of contractual obligations and the burden of costs will be handled when an emergency arises that threatens business continuity.

It is often placed in contracts as boilerplate, but depending on whether the clause exists and how its wording is designed, the financial and legal burden on a company when a crisis occurs changes greatly.

Companies that want a lawyer to check contract clauses allocating responsibility for disasters and system failures can turn to our legal outsourcing, in which lawyers with corporate legal experience take on contract review and legal questions on a continuing basis.

Requirements for Force Majeure and Covered Events

A force majeure clause is a clause that provides for an exemption from liability for damages, a grace period for performance, termination of the contract and so on where contractual obligations cannot be performed due to events beyond the parties' reasonable control. Covered events include natural disasters such as earthquakes and typhoons, the spread of infectious diseases, war and terrorism, and some contracts even list power and telecommunications failures, cloud service outages, cyberattacks and supply chain disruptions.

However, listing a broad range of events does not mean you are safe. If the covered events are too broad, even ordinary business risks may be exempted, and you may no longer be able to expect performance from the other party. Conversely, if they are too narrow, you may be unable to use the contractual grace periods or exemptions even when a disaster you anticipated occurs. Determine whether the listed events are commensurate with the risks that can realistically be expected in your business.

It is also important to note that the mere fact that covered events are listed in the contract does not mean that liability is automatically exempted when such an event occurs. Check what range of events the contract covers and what conditions it attaches to the exemption. Consider, in light of the contract and the actual circumstances, matters such as whether the situation could reasonably have been managed or avoided, whether the delay or impossibility of performance was caused by that event, and whether alternative measures were possible. Even where the contract has no force majeure clause, whether there is liability for damages is determined by the statutory rule under Article 415 of the Civil Code, namely whether there are grounds attributable to the obligor.

Distinguishing Which Obligations Are Exempted, and Notice and Alternative Measures

When force majeure occurs, distinguishing which obligations are exempted and which survive is extremely important in practice.

For obligations to deliver goods or provide services, it is common for force majeure to exempt the party from liability for damages for delay in performance. However, payment obligations that have already arisen, confidentiality obligations and the obligation to report a personal data leak need to be checked separately as to whether they are covered by the exemption. In particular, for monetary obligations, Article 419(3) of the Civil Code provides that the obligor "may not raise force majeure as a defense," so in principle liability for damages for delay in performing a monetary obligation cannot be avoided on the ground of force majeure. The occurrence of a disaster does not automatically extinguish the obligation to pay the price, and whether a grace period for payment or the like is granted is a separate matter depending on an express contractual agreement or individual discussions afterward. Make sure that obligations that should be maintained even in abnormal circumstances have not slipped into the scope of the exemption.

In addition, as the initial response immediately after a force majeure event occurs, an obligation to notify the other party is set. The clause provides that the party will promptly notify the other of the extent of the impact and the prospects for recovery and resumption of performance. An arrangement such as "notice within 24 hours of the occurrence of the event" is one example of contract design; there is no uniform statutory notice deadline. It is necessary to set a realistic deadline and reporting content in light of your company's initial response system. Also decide the notice recipient and the responsible department.

In addition to notice, reasonable alternative measures to prevent damage from spreading are also an issue. Agree how far the parties will respond, based on cost and feasibility, such as an obligation to seek alternative means if a logistics route is cut off, or an obligation to switch to a backup environment when a cloud outage occurs. Even where the provider seeks an exemption, also providing for the communication and discussion of alternative measures that the user needs makes the response in abnormal circumstances concrete.

Termination When the Event Is Prolonged and Settlement

If the impact of force majeure is temporary, it may be possible to respond by extending the performance deadline or rescheduling. However, where a halt in the supply of components or a suspension of service drags on for several months, an exit design for ending the contract is needed.

Make clear after how many days of the event continuing the contract may be terminated, whether the right of termination is granted to both parties or only to the affected party, and, if terminated, how the consideration for the portion already performed, advance payments and the costs of work in progress will be settled. Under statutory termination in the Civil Code (Articles 541 and 542), grounds attributable to the obligor are in principle not required, but by specifying concretely in the contract the requirements for termination and the method of settlement, it becomes easier to confirm when to decide on termination and how to settle.

Practical Issues by Contract Type and Preparation in Normal Times

How a force majeure clause operates also differs greatly depending on the type of contract.

In SaaS and IT-related contracts, the issue is where to draw the line between service outages, SLAs (service level agreements), security incidents and the force majeure clause. Even where cloud outages and line failures are included in force majeure, if outages caused by the vendor's inadequate management or mishandled security measures are also exempted as force majeure, the burden on the user becomes excessive. Check the outages covered by the SLA and the exclusions, and clarify their relationship with the force majeure clause. Also compare with the service specifications who is responsible for backups and recovery in the event of data loss.

In contracts involving supply chains, such as manufacturing and logistics, the focus is on allocating supply when raw material shortages or transport disruptions occur. Check to which customers supply will be allocated when it is short, whether substitutes can be used and whether prices can be changed. Also decide on the procedure for coordinating who bears the cost of procuring substitutes and soaring logistics costs.

For the clause to function in an emergency, it is essential to put an operational system in place in normal times. Even if the contract provides for a prompt notice obligation, it is difficult to comply with the clause if the company has not developed a business continuity plan (BCP) and an emergency contact network. In addition, when an event occurs, explanations may be needed not only to the contracting party but also to the end users beyond them. To avoid contradictions between external disclosure standards and explanations and the contractual scope of exemption, decide when to use individual communications and when to use public announcements, the timing of explanations and the inquiry contact point, and prepare anticipated questions and answers.

Frequently asked questions

What is a force majeure clause?

It is a clause that provides for release from liability, an extension of the performance deadline, termination of the contract and the like when a party cannot perform its obligations due to events beyond its reasonable control. Its purpose is to agree in advance how liability for non-performance and costs will be handled in situations that cannot be controlled through reasonable efforts, such as natural disasters, epidemics and system outages. It is understood that even without such a clause, whether liability exists is determined under Article 415 of the Civil Code.

If a disaster occurs, is the obligation to pay the price also excused as force majeure?

As a rule, delay in performing a monetary obligation is not excused on the grounds of force majeure. This is because Article 419(3) of the Civil Code provides that force majeure cannot be raised as a defense. The obligation to pay the price does not automatically lapse even if a disaster occurs, and it is understood that an extension of the payment deadline is a separate matter for an express contractual agreement or individual discussions after the fact.

If the contract lists the covered events, is a party automatically released from liability when one occurs?

A party is not automatically released from liability just because such an event has occurred. Whether the situation could reasonably have been managed or avoided, whether the delay in or impossibility of performance was caused by that event, and whether alternative measures were possible are determined in light of the actual circumstances. It is thought that even if the contract lists the covered events, the scope set by the contract and the conditions for release from liability must be satisfied.