Indeed, any time spent in the aftermath of a mishap “discussing” if the event was Force Majeure, negligence or had other causes severely impacts operations and can increase the costs of consequences.
Thus the optimization of Force Majeure formulation, if it was possible to renegotiate contracts in the future, or for any new contract, would constitute an important proactive mitigative measure with very large ROI (Return On Investment).
There are numerous areas where optimization could take place, for example under the form of a more detailed explanation of terms, definition of threshold values, definition of mitigative levels that are considered “common practices” or “best practices”, and therefore a definition of negligence, as well as the limiting value of Force Majeure. You can check out Riskope’s presentation on this subject here.
Riskope work in this area constitutes a specialized technical support to the lawyers drafting the contract, based on Risk Based Decision Making (RBDM) concepts that allow transparent definition of terms like “reasonable” precautions/alternatives, due diligence in running an operation, maintaining it, being proactive to ensure the contractual performance criteria, etc.
Riskope ecommends the list of potential hazards which possibly lead to a Force Majeure event should be balanced (it has to be either generic or detailed, but should be homogeneous and balanced). Furthermore, an optimized Force Majeure clause formulation should encompass likelihood/probability/frequency vs. magnitude limits to events that are considered as “ordinary” vs. “Acts of God”.
The definition of what constitutes an Act of God should be made very clear to optimize the Force Majeure clause. This can be understood with an example: if we consider a commercial contract for a facility in Salt Lake city, one could have said that a tornado in Salt Lake city was an Act of God (scientific consensus that a tornado was not a credible, “impossible” event in Salt Lake city) until one happened on August 11, 1999. From that point on, a tornado in Salt Lake City became a rare, but credible event.
Of course at this point terms such as “credible” have to be clarified, as their definition is intimately linked with the limiting value of Force Majeure. It can also be said that lack of preparation (contingency plans, maintenance, mitigation) for a credible event is a default, even a negligence.
In the chapter devoted to general concepts of risk mitigation in our book (Improving Sustainability through Reasonable Risk and Crisis Management, by Franco & Cesar Oboni, ISBN 978-0-9784462-0-8, 2007) we wrote that in recent times “standardized levels of risk reduction” have been formulated (in various industries), and at least three of these definitions are now in common use among analysts. These three levels of risk mitigation also represent a convenient way to elude explicit tackling of risk tolerability, especially when the delicate theme of human life has to be dealt with. However these standardized levels of risk reduction can also be seen as a way to define “state of the art” practice”. Anything below a pre-defined ALARA, ALARP, BACT level can be considered as “negligent” (NB: in recent years it has been noted that public opinion tends to consider negligent even mitigative levels that are above these limits, thus leading to image risks even when “reasonable mitigative behavior” is followed by corporations).
Here are the definitions of the three “standard” levels of mitigation:
ALARA: ALARA is an acronym for the phrase As Low as Reasonably Achievable (Wilson, Crouch, 1982). It is most often used in reference to chemical or radiation exposure levels.
ALARP: ALARP stands for As Low as Reasonably Practicable, and is a term often used in the milieu of safety-critical and high-integrity systems. The ALARP principle is that the residual risk shall be as low as reasonably practicable. For a risk to be ALARP it must be possible to demonstrate that the cost involved in reducing the risk further would be grossly disproportionate to the benefit gained. The ALARP principle arises from the fact that it would be possible to spend infinite time, effort and money attempting to reduce a risk to zero. It should not be understood as simply a quantitative measure of benefit against detriment. It is more a best common practice of judgment of the balance of risk and societal benefit.
BACT: (Best Available Control Technology) For example: an emission limitation based on the maximum degree of emission reduction (considering energy, environmental, and economic impacts) achievable through application of production processes and available methods, systems, and techniques. BACT does not permit emissions in excess of those allowed under any applicable Clean Air Act provisions. Use of the BACT concept is allowable on a case by case basis for major new or modified emissions sources in attainment areas and applies to each regulated pollutant
No matter which mitigative level is adopted as “standard, non negligent, practice”, a fundamental step is to define against which event it is necessary to mitigate (as it is a “credible” event) and against which event, we humans, have to humble, as it can be considered an Act of God.
Like for risk, the technical definition of credibility differs quite substantially from the “colloquial” definition. The next paragraph defines “credibility” in technical terms.
From the Process Industry literature, and other industries where major accidents/events are a concern, we read that a credible accident is defined as ‘the accident which is within the realm of possibility (i.e., probability higher than 10-6/yr) and has a propensity to cause significant damage (at least one fatality)’. This concept comprises both probable damage caused by an accident and probability of its occurrence.
The threshold value of 10-5 is a generally accepted value used in seismic, geological and other sciences to define “maximum credible events”.
So it could be assumed, for the optimization of the Force Majeure clause, that events with a probability of occurrence of less than 1 in a million (10-6), or less, belong to Acts of God ,whereas events with a probability of at least 1 in hundred thousand (10-5), or more are credible.
Riskope has gathered within its research numerous examples of definition of Maximum Credible Events (MCE), which can be very different per industry, type of events, basic understanding or consensus of what is credible/non credible, thus stressing the fact that proactive formulation/optimization would greatly enhance contracts.
Furthermore, if we put these findings in perspective with our rapidly changing world (cyberspace, blogosphere, climatic changes, demography etc.) it becomes apparent that limiting uncertainties in the definition of MCE in a Force Majeure Clause is of paramount importance.