What is an External Risk?

In contract law, external risk refers to unlikely events beyond the control of the parties entering into the contract that, if they occur, will have a substantial detrimental effect on the agreement between the parties. These events — e.g., earthquakes, fires, and floods — though naturally occurring and expected to a degree, are generally considered unforeseeable acts of God. Many contractual agreements will account for the possibility of external risk through a force majeure clause as a contingency for the occurrence of any such event.

In order for someone to be held liable under tort law for something such as negligence, the cause of harm must have been foreseeable. Events that are an external risk are generally held to be superseding unforeseeable events in which, if they occur, generally no party can be held liable for such harm. The concept of foreseeability is designed to hold a party responsible for his or her actions and prevent innocent parties from being held responsible for harmful results that could not reasonably be expected from their course of action. For example, if someone who runs a farm employs a farmhand to drive a plow through the farm’s fields and a thunderstorm quickly and unbeknownst to either party forms and the farmhand is struck by lightning, he or she may bring a negligence claim against the farmer. However, because the sudden thunderstorm and resulting lightning were an unforeseeable external risk, the farmer would not likely be held liable for the harm to the farmhand.

Contracts often have a force majeure clause which is designed to account for any external risk that may negatively impact the agreement if such events occur. Force majeure — French for “superior force” — clauses generally enumerate several events, such as earthquakes or flooding, which, if they occur and frustrate the purposes of the agreement, would release both parties from liability under the contract. In the context of contracts law, external risk may refer not only to natural disasters, but may also account for other events beyond the control of the parties. An example of this might be a strike by workers that are necessary for the timely fulfillment of either party’s obligation under the agreement.

External risk events are unpredictable by nature, and someone who is at particular risk of loss due to one of these events may take out a casualty insurance policy to protect against such damage. For example, someone who runs a factory located near a large river may protect his assets in the factory by taking out a casualty insurance policy that covers flash floods. This way, he or she will be reimbursed for any damage in the event that the river unexpectedly floods and the flood waters reach the factory.