Commercial Division Blog

Posted: January 21, 2017 / Categories Commercial, Contracts

Broad Force Majeure Clause Enforced

On January 17, 2017, the First Department issued a decision in Constellation Energy Services of New York, Inc. v. New Water Street Corp., 2017 NY Slip Op. 00260, enforcing a broad force majeure provision, explaining:

Force majeure clauses are to be interpreted in accord with their purpose, which is to limit damages in a case where the reasonable expectation of the parties and the performance of the contract have been frustrated by circumstances beyond the control of the parties. When the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.

. . .

The agreement also provides that a force majeure event may be a defense to a price adjustment claim, stating that plaintiff may seek its increased costs or decreased revenue if it determines that there has been a material and sustained change from an Account's Baseline for reasons other than Force Majeure. By these express terms, the expansive force majeure clause was intended to protect any party to the agreement which was unable to perform its obligations under the contract by a force majeure event, defined as an event which prevents one Party from performing its obligations hereunder, which event was not (i) within the reasonable control of, or (ii) the result of the negligence of, the Claiming Party, and which, by the exercise of due diligence, the claiming Party is unable to overcome or avoid. The examples that follow this specific definition are qualified by the statement that they are without limitation, and do not limit the application of the clause to the scenario in which the force majeure event curtails or disrupts the transmission of electricity, rather than where the buyer's actual usage did not meet the baseline because, as a result of the damage from an unforeseen event (Hurricane Sandy), a certain number of tenants were unable to occupy the building, even after power was restored.

Plaintiff argues that the force majeure clause does not provide a defense to its rate adjustment claim because the agreement did not impose a contractual obligation on defendant to reach the baseline, which only served as a basis for determining the final rate. However, plaintiff's interpretation fails to give due weight to the language of the price adjustment clause allowing plaintiff to recover its increased cost or decreased revenue if the baseline was not met. By allowing plaintiff to recover its decreased revenue, the clause effectively obligated defendant to pay for the baseline amount of electricity, whether it used it or not.

(Internal quotations and citations omitted). The court went on to hold that there were nonetheless questions of fact regarding whether "the force majeure clause would be an absolute defense" and "that" the defendant's "failure to meet the baseline was an unavoidable result of the storm, including whether or not the tenants could have been restored to their space sooner, and whether the failure to do so was beyond its control."