Force Majeure clauses are meant to excuse non-performance provided the failure to perform could not be avoided or cured by the exercise of due diligence and care. However, they do not cover failures resulting from a party’s poor financial condition or negligence. The intention of the Force Majeure clause is to excuse liability when the non-performing party cannot preasonably perform on a timely basis.
A key element in excusing non-performance would be to show the party claiming Force Majeure could not cure his failure to perform by any reasonable expenditure of money or efforts. Winter floods in the Australian state of Queensland were clearly to blame for non-performance by coal suppliers. Few would argue that flood-inundated mines and railroads made it impossible for both mines and railroads to deliver coal to the export terminals, and that no reasonable effort or expenditure of money would make it possible for them to perform in the short term. Now that these floods are over, some mines are prevented from pumping flood waters out of their mines by environmental regulations, a frustrating “paper” Force Majeure.
Recent tornadoes in Missouri made it impossible for some registrants at a conference in Colorado Springs, Colo., to arrive on time for their first night of reservations. A tornado had hit St. Louis’ Lambert Field only two days before the first night of the conference, making it impossible for registrants to cancel hotel reservations the required seven days in advance. Conceivably the hotel could have charged for unused nights of reservations, but chose not to do so. Clearly, this was a Force Majeure event.
When railroad bridges are washed out by floods and no other route exists, it is clear the railroad has a Force Majeure. When a landslide sweeps a section of rail off a mountain and no other route exists, it is clear the railroad has a Force Majeure.
Many situations are not quite so clear, however. Consider the case of two derailments occurring in 2005 on the Joint Line of the Powder River Basin. The Joint Line is a 103-mile section of track extending southward from Caballo Junction to Shawnee Junction, and is used by both BNSF and UP railroads to haul coal from mines in that region to utility customers in the eastern and southeastern United States. In early May 2005, both BNSF and UP had derailed coal trains within a very close distance to each other.
When the derailments occurred BNSF had the option of running its trains to the north past Caballo Junction, and then running to the east or southeast over its own tracks. The longer routes would probably be more costly to BNSF. A claim of Force Majeure could probably not be upheld, but there is no evidence it was rejected. It seems logical that UP could do the same, but was that really the case?
The Joint Line ends at Caballo Junction. UP has no right to run its trains over BNSF tracks north of Caballo Junction. It would appear in this case we have a situation where BNSF cannot claim Force Majeure, but UP may have a valid claim of “paper” Force Majeure. To any utility whose PRB coal deliveries have been cut off it may seem that UP has a thinly-veiled excuse, one that could be cured by negotiating a trackage rights deal with BNSF. A utility may in fact require UP to show it had tried to persuade BNSF to enter a trackage rights agreement, and were unsuccessful.
This particular case was very curious. BNSF lifted its claim of Force Majeure June 3, 2005. However, according to a 2005 customer update, UP did not lift its Force Majeure until November 23, 2005, more than five months later. Presumably, the same track repairs that enabled BNSF to end its Force Majeure quickly would enable UP to end its at the same time, but for unknown reasons that did not happen.
We know from publicly-available reports that AECC filed a claim against UP for failure to deliver the contracted amount of coal, which AECC had to make up by buying more expensive coal. We also know the parties settled out of court in late 2010, suggesting UP paid consequential damages. It would appear UP’s claim of Force Majeure did not meet contractual requirements.
Failure to Use Force Majeure
The time factor is important in Force Majeure claims; many clauses give a 30-day period in which to make such a claim. It could be more or less than 30 days, but there is usually a reasonable time limit that both parties have agreed upon. A typical coal stockpile contains 30 days’ burn, more or less. It is the coal buyers’ job to make sure there is always an adequate supply of coal, so he will be alert to delivery problems. In time of floods he will be especially alert. Consider the utility whose serving railroad has lost its ability to deliver coal because a bridge has been washed out by flood waters.
The floods of 1993 prevented several railroads from delivering coal to electric utilities because the rail line was underwater or a bridge was out, or some other flood-related obstruction. Even though it could not deliver coal, one railroad (Rail “X”) refused to file a claim of Force Majeure; it refused to use its contractual excuse for failure to perform. The utility had no choice but to acquire substitute coal, which it could do from a source on a competing railroad (Rail “Y”). The utility would be required to mitigate its damages, meaning it could not buy from the most expensive source available, but it had a strict obligation to buy substitute coal and keep its plant running.
Since Rail “X” had not made claim of Force Majeure within the contractual time limit, it became liable for the additional costs incurred in buying substitute fuel. In what had to be one of strangest maneuvers one could imagine, Rail “X” went to court and got an injunction prohibiting the movement of coal over the Rail “Y” route. The utility ignored the injunction and continued to take coal. The injunction was not enforced.
What is important to realize is the refusal to take the Force Majeure remedy within the contractual 30 days opened Rail “X” to paying consequential damages. It seems unlikely a judge would force the utility to sit and do nothing until Rail “X” was able to deliver coal again. It does seem likely the railroad, having refused its contractual remedy of Force Majeure, would have no defense when required to pay consequential damages, and would probably learn that failure to claim Force Majeure does not preserve contract tonnage for them to deliver at some unspecified future time.
Financial Problems not a Force Majeure
A trucking company made a 10-year contract to deliver 500,000 tons of coal per year to a utility plant expecting that a county road authority would continue to maintain the only access road. When the haulage agreement was negotiated the trucking company said nothing about continued road maintenance being essential to its performance. In the third year of the contract, the county made large cuts in road maintenance budgets. A year later the road had become deeply rutted and barely passable due to heavy rains. Delivery times were doubled, and the trucking company was becoming frustrated.
The trucking company complained to the utility it could not meet its annual tonnage requirements without maintaining the road itself, but to do so would cause the operation to become unprofitable. The utility was unsympathetic, responding that the trucking company were “big boys” and should have known how to protect themselves contractually against such a basic problem as road erosion.
This was clearly not a Force Majeure situation because the trucking company was able to deliver coal. However, it was a situation that could degrade into bankruptcy and breach of contract if the trucker’s financial burden kept increasing. If the utility failed to realize the seriousness of the problem, it could very well see the trucker go out of business and have to deal with another trucker, who would most assuredly notice the poor condition of the road and charge accordingly. Commercial frustration—financial distress—is not the same as Force Majeure.
This is one of those situations that illustrate it may be in the best interest of both parties to negotiate a settlement of some kind, regardless of what the contract does or does not say. It also illustrates the importance of careful thought when negotiating a contract. The parties can define a Force Majeure when writing the contract, and that would have helped the trucker in this case.
Gambrel is the president of Logisticon, a coal transportation consultancy. He may be reached at email@example.com or at firstname.lastname@example.org.