Contracting Risks

Abstract

Contracts serve an important function: allocation of risks. In achieving this function, contractual parties routinely include a force majeure clause in their contracts to be excused from performance in the face of a supervening event. But what events qualify to excuse performance and how have courts approached force majeure clauses? Scholars emphasize parties’ intent and contractual language. Courts’ decisions, however, have been inconsistent. This Article provides novel data showing the leading role of the control factor and argues that parties’ reliance (not control) should be the center of force majeure inquiry. As courts become inundated with a slew of claims arising out of COVID-19 disruptions, it is critical to have a fresh look at force majeure clauses.

Using empirical methods (including machine learning and natural language processing) and doctrinal analysis, this Article makes the following contributions: First, based on empirical analysis of force majeure clauses and behavioral economics, it argues that parties primarily do away with the basic assumption requirement in their force majeure clauses. Second, by parsing through past courts’ decisions, it shows that courts have relied on three factors (i.e., control, foreseeability, and language) to approach force majeure clauses. Third, using com-putational tools on force majeure cases since 1810, it shows that the control factor (beyond the control of the parties) is the most important factor in courts’ decisions. Fourth, the Article suggests an overhaul shift based on promisee’s reliance rather than solely based on promisor’s ability to control.

Keywords: Force Majeure, Contracts, COVID-19, Risk Management, Impossibility, Reliance, Natural Language Processing, Machine Learning

JEL Classification: K12, K00, K10