Parties to a commercial contract normally include a force majeure clause to protect themselves from penalties for certain specified breaches when circumstances beyond their control render performance untenable or impossible. The decision in Kyocera Corporation v. Hemlock Semiconductor should remind companies that a force majeure clause will not rescue a breaching party from every risk, even if the parties believed they drafted the provision to cover the impacting event (No. 327974, (Mich. Ct. App. Dec. 3, 2015)).

On December 3, 2015, the Court of Appeals of Michigan affirmed the trial court's summary judgment against Kyocera, holding the company responsible for breaching contracts worth over $2 billion. Kyocera had entered into several long-term take-or-pay contracts with Hemlock to purchase large quantities of polycrystalline silicon (polysilicon), a material Kyocera used in the manufacture of its solar panels, following a worldwide shortage of the material. The partnership was founded on the shared belief that both companies would greatly expand their manufacturing capacities in order to meet the increasing global market for solar panels. Hemlock depended on the contracted-for fixed price to justify its expansion, while Kyocera secured a long-term, stable supply of polysilicon for its solar panels.

Kyocera believed it was protecting itself from market disruptions that could have potentially threatened its polysilicon supply, while gaining a protected price. However, during the implementation of the agreement, the Chinese government began providing illegal subsidies to Chinese companies, some of which were state owned, to corner the solar industry. As a result, solar prices dropped significantly and China gained a majority stake in the global solar panel market, causing over 20 US and European manufacturers to go out of business.

In response, Kyocera sent Hemlock a notice that it would be exercising its rights under the force majeure clause of the agreement, which excused failures in performance that arose out of or resulted from causes beyond such party's control, including acts of the Government. The contract did not specify the acts or governments to be covered under the agreement. Neither the trial court nor court of appeals agreed with Kyocera. The courts stated that if Kyocera wanted to protect itself from this type of liability it should have also negotiated a clause that excused contractual performance resulting from unprofitability due to governmental market manipulation. Having held that Kyocera failed to allege an applicable force majeure event, the courts held that Kyocera was in breach of the contract, and subsequently owes Hemlock up to $1.7 billion.

This case is an example of why it is important to understand the risks of relying on a force majeure clause. This clause should appropriately allocate the risk of the specified events to each party and be adapted to fit the circumstances of each transaction. When negotiating and drafting a force majeure clause, parties should consider whether:

Force majeure clauses typically contain the following parts:

The negotiated list of force majeure events typically covers:

For more information on drafting and negotiating force majeure clauses, see Practice Notes, Force Majeure Clauses: Key Issues and Risk Allocation in Commercial Contracts.

For sample force majeure clauses, see Standard Clauses, General Contract Clauses: Force Majeure and Boilerplate Clauses: Force Majeure.

For more information on drafting and negotiating force majeure clauses in supply chain contracts, see Standard Documents: