Important Considerations When Invoking Force Majeure
Photo by Edwin Hooper
The COVID-19 pandemic has given rise to a multitude of unanswered questions—among them being “What if I can’t meet my obligations under a contract I’ve signed?” These questions can be a cause for anxiety, but with the proper contractual infrastructure, one can avoid some potential headaches. One example is a Force Majeure Clause. A Force Majeure Clause is a “boilerplate” provision in many contracts that excuses a party from performing its obligations under the contract if circumstances beyond the party’s control arise which make such performance impossible, impracticable, or illegal. Force Majeure Clauses typically include the following:
a list of delineated “Force Majeure Events” that can excuse a party’s performance under the contract, which can include fire, flood, war, acts of God, famine, strikes, governmental orders, epidemics, or pandemics;
a catch-all provision to broaden the scope of the Force Majeure Events;
a standard for invoking the occurrence of a Force Majeure Event, which is usually by writing; and
the notice requirements for invoking a Force Majeure Event.
Force Majeure Clauses are used to protect the contracting parties from damages which may accrue from a breach occurring as a direct result of a Force Majeure Event. To obtain relief under a Force Majeure Clause, a party must show that (1) a particular event falls within the list of Force Majeure Events, and (2) that this event is a direct cause of the party’s inability to perform its contractual obligations.
Given the “boilerplate” nature of Force Majeure Clauses, these clauses are often overlooked, and therefore don’t always offer sufficient protection. Thus, here are several key points that one should keep in mind when drafting a Force Majeure Clause into a contract:
Legal or Physical v. Economic. To obtain relief from one’s obligations under a contract through a Force Majeure Clause, the Force Majeure Event cannot be merely an economic restraint (e.g., the party’s inability to pay or other financial difficulty)—rather, the Force Majeure Event must be a legal restraint (e.g., governmental order) or a physical restraint (e.g., natural disaster, war, etc.). Otherwise, contractual parties would breach their obligations more often and simply invoke the Force Majeure Clause as a defense. To combat this, many Force Majeure Clauses also specifically provide that the parties cannot invoke a Force Majeure Event to excuse a party’s breach of its payment obligations under the contract.
Acts of God. Invoking a Force Majeure Clause as a defense due to an “Act of God” is only effective if the Force Majeure Event is the sole cause of the party’s inability to perform its obligations. For example, if a warehouse fire caused by lightning destroys one party’s goods that were to be delivered that day, a party will only be able to invoke a Force Majeure Clause that covers this type of occurrence if the lightning and resulting fire were the sole cause of the nonperformance. (Note: if the goods were to be delivered at 8:00 am that morning, and the fire occurred at 6:00 pm that evening, then the party’s delay in making delivery could prevent the Force Majeure Clause’s applicability.)
Catch-all Provisions. Many Force Majeure Clauses include catch-all language in the list of Force Majeure Events (e.g., “. . . and any other occurrence that is beyond the affected party’s control”). This language, however, does not always cover the parties as broadly as it reads. Courts routinely interpret catch-all provisions narrowly and typically require an event to be closely-related to some of the specifically enumerated Force Majeure Events in order to be enforceable. Thus, an unforeseen cannot be greater than or of a different quality from the specifically enumerated Force Majeure Events in order to be applicable.
Notice Requirements. It is best practice to carefully consider when a potential Force Majeure Event began so notice is timely given. Failure to give the other party timely notice that a party’s performance under a contract is affected by a Force Majeure Event (like failure to bring suit within the statute of limitations period) could result in an inadvertent waiver of that party’s ability to obtain relief for its failure to perform. It is also important to note that a Force majeure Event does not always render a party’s performance under a contract unenforceable indefinitely—given the circumstances, the Force Majeure Event could only be temporary and applicable during the period of time the Force Majeure Event actually restrains the affected party’s performance under the contract.
Termination Rights. Some Force Majeure Clauses contain language that allows the non-affected party to terminate the contract if the affected party’s failure to perform lasts for a specific period of time (e.g., “for a period of 30 days or more”). Thus, it is important for a party considering whether to invoke the Force Majeure Clause to first weigh the risks of potential termination.
Force Majeure Clauses vary widely in applicability and scope, and therefore it is advisable to retain counsel who understands and appreciates the relationship between the contracting parties in order to draft a meaningful (and enforceable) Force Majeure Clause into a contract. Nonperformance of a contract can lead to an expensive and lengthy breach of contract lawsuit, so it is always best to understand the difference between when a Force Majeure Event is applicable, and when a party is simply trying to take advantage of a situation.
For more information on this article and this topic, contact Charles Wallace.