Contracting Risks

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 how do force majeure clauses allocate risks? This Article breaks down this inquiry into three interrelated questions: (i) why do parties include force majeure clauses considering the robust common law excuse doctrines such as impossibility? (ii) How have courts historically approached force majeure clauses? And (iii) what serves as the most equitable and efficient framework for the risk-allocative function of force majeure clauses? This Article’s fresh look at force majeure clauses will inform courts’ approach to a slew of claims arising out of Covid-19 disruptions and future shocks.

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 common law’s basic assumption (ex ante) requirement in their force majeure clauses to focus instead on ex post analysis. Second, ’using computational methods on force majeure cases since 1810, it shows that the control factor (as opposed to foreseeability, parties’ intent, and contractual language) has been the leading factor in courts’ decisions. Third, the Article normatively suggests an overhaul shift towards a proportional ex post analysis of force majeure clauses which allocates risks pursuant to promisor’s measures to control the effects of the supervening event and promisee’s degree of reliance on contractual promises.

a. Assistant Professor, California State University, Northridge, David Nazarian College of Business & Economics, Department of Business Law. JSD, LL.M, Yale Law School, LLM in Business Law, U.C. Berkeley Law School.

The full text of this Article is available to download as a PDF.