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Commercial Aftershocks of the Great Eastern Japan Earthquake: Force Majeure and Related Issues

May 12, 2011

By John E. Porter & Barry A. Brooks

The March 11, 2011 Thoku earthquake and tsunami, which the Japanese government formally named as the Great Eastern Japan Earthquake (Higashi Nihon Daishinsai) was undeniably a disaster of Biblical proportions. According to the U.S. Geological Survey, the 9.0 magnitude earthquake is the fourth largest in the world since 1900 and the largest in Japan since modern instrumental recordings began 130 years ago. Tens of thousands of people were killed, a comparable number are still missing or injured, and many more have been displaced from their homes. The earthquake and tsunami wrought tremendous devastation, including serious damage to the Fukushima Daiichi Nuclear Station. According to some reports, the damage to the Fukushima Daiichi Nuclear Station has released enormous amounts of radiation, more than 100,000 times as much as was released in the Three Mile Island nuclear incident in 1979. The Japanese government recently raised the severity rating of the nuclear accident to a 7 on the International Nuclear Event Scale, the highest severity level possible and the rating shared by the Chernobyl nuclear disaster in 1986.

The economic fallout from the Great Eastern Japan Earthquake is likely to continue for some time. Some have estimated that the total cost of recovery exceeds several hundred billion dollars, making it the most costly natural disaster ever. In addition to damage to factories, offices, and infrastructure caused by the earthquake and tsunami, the radiation risk has rendered some factories and offices unusable. Similarly, because of damage to Japans electrical power capability in the affected region, other factories have had to shut down. A number of companies temporarily halted production in Japan in March. Even when production resumed, many factories had to operate at limited capacity because of parts shortages. Operation of factories at limited capacity will have ripple effects, even on companies that did not directly suffer damage from the Great Eastern Japanese Earthquake. Companies whose factories are operating at limited capacity will need fewer materials, parts, and components than they had anticipated needing before the earthquake. In turn, suppliers of those materials, parts, and components will want to reduce their purchases from their own suppliers. Additionally, business down the supply line, which require manufactured equipment or components from factories in the affected region, are not receiving the products or supplies they need to use in their operations or to complete products or projects for customers. The impact ultimately will extend all the way up and down the supply chain.

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Image: Barry A Brooks
Barry A Brooks
Partner, Corporate Department