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External risk in contract law refers to unforeseeable events beyond the control of parties, such as natural disasters, which can be accounted for through force majeure clauses. Liability for damages under tort law requires foreseeability, and external risk events can be protected against through casualty insurance.
In contract law, external risk refers to unlikely events beyond the control of the contracting parties which, if they occur, will have a material adverse effect on the agreement between the parties. These events – such as earthquakes, fires, and floods – while occurring naturally and to some extent expected, are generally regarded as unforeseeable acts of God. Many contractual arrangements allow for the possibility of external risk through a force majeure clause as a contingency for the occurrence of that event.
In order for someone to be held liable under tort law for something such as negligence, the cause of the damage must be foreseeable. Events constituting an external risk are generally deemed to be substitutes for unforeseeable events where, if they occur, generally neither party can be held liable for such damage. The concept of foreseeability is designed to hold a party accountable for his or her actions and prevent innocent parties from being held liable for harmful results that they could not reasonably have expected from their course of action. For example, if someone who runs a farm employs a farmhand to drive a plow across the farm fields and a thunderstorm forms quickly and unbeknownst to either party and the farmhand is struck by lightning, he or she may file a negligence claim against the farmer. However, since the sudden storm and subsequent lightning strike was an unpredictable external hazard, the farmer would probably not have been held liable for the injury to the farmhand.
Contracts often have a force majeure clause which is designed to account for any external risks that could negatively impact the agreement if such events occur. Force majeure clauses – French for “force superior” – generally list several events, such as earthquakes or floods, which, if they occur and defeat the purposes of the agreement, release both parties from liability under the contract. In the context of contract law, external risk can refer not only to natural disasters, but can also explain other events beyond the control of the parties. An example of this could be a strike of workers necessary for the timely fulfillment of the obligations of both parties under the agreement.
External risk events are unpredictable in nature, and someone who is at particular risk of loss from one of these events can take out casualty insurance policy to protect against such damage. For example, someone who manages a factory located near a large river can protect his assets in the factory by taking out a casualty insurance policy that covers flash flooding. In this way, any damage will be compensated in the event that the river suddenly floods and the flood waters reach the plant.
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