As a result of forced closures and disruptions to supply chains connected with the Covid-19 pandemic, many businesses are facing the reality that they will not be able to complete obligations agreed to in contracts entered into prior to the crisis. This has brought new attention to an often-overlooked portion of contract law: force majeure
Sometimes referred to as “Act of God” clauses, force majeure provisions lay out the rules for how contract obligations will be affected if defined events outside of the parties’ control hinder their ability to comply with the contract. Typically, when a party fails to comply with the terms of a contract, they are in “breach,” and the non-breaching party may sue them for the damages caused by the breach or other damages laid out in the contract itself. Force majeure literally translates to “superior force” and fittingly is intended to protect a party who cannot complete the terms of the contract because of intervening forces outside of their control. To be effective for this purpose, the clause must be (1) enforceable, (2) successfully triggered, and (3) provide an adequate remedy or alternative.
States vary in the enforceability requirements for force majeure clauses. Some states require certain formalities to be made and vary in how they interpret terms like “unforeseeable.” It is important to make sure you understand how your state interprets any contracts you enter into and which state law will be used when settling disputes related to the contract. Another aspect of enforceability is whether the procedure for using the provision was properly followed. Some contracts require notices be delivered of the intent to rely on the force majeure clause. Failing to follow the procedure outlined in the contract may result in forfeiting the benefits of the force majeure clause.
To trigger the protections afforded by force majeure provisions, an event described in the clause must occur. Courts tend to use strict contractual analysis when interpreting the clauses, meaning that the exact phrasing in the contract will usually control and courts will be reluctant to read in provisions not explicitly included in the text. Common trigger events include natural disasters like floods, hurricanes and earthquakes, acts of terrorism, war, riots, and publicly declared states of emergency. When the term “Act of God” is used, the commonly accepted definition is any event which may be attributed entirely to nature without human interference. Economic hardship or shifts in the markets are unlikely to trigger a force majeure clause, as these risks are present in every contract and courts typically assume the parties have factored them in when entering into the agreement.
Many of these clauses are already written to expressly include epidemics and pandemics. Even without explicit reference to epidemics or pandemics, it is possible such events may fall under references. For example, a force majeure clause including terms for governmental action or restrictions may allow the clause to trigger not because of the pandemic itself, but because of state and federal actions taken to combat it. It is likely that in years to come, more clauses will be written to explicitly include these triggers to avoid any room for doubt over whether they qualify.
When successfully triggered, a force majeure clause usually will allow for the obligations of the contract to be terminated outright, altered in some way, or delayed. These remedies need to be considered carefully when drafting the clause to ensure the protection provided is a good fit for the subject matter and facts related to the contract. For example, a clause allowing either party to unilaterally terminate the contract when triggered may not be in your best interest if the transaction in the contract is beneficial to you, but you just need more time to complete it. What happens to money paid in advance and how partial performance will be treated are also things to consider when drafting the remedy section of the clause.
In the absence of an enforceable force majeure clause, there may be other options which allow a breaching party to escape liability for breaking the contract. The common law doctrines of impossibility and frustration of purpose may also provide relief from a contract’s terms in times of unforeseen emergency. While beyond the scope of this article, in short, these defenses to a breach of contract cover situations where an unforeseen event, not reasonably anticipated by the parties, either makes compliance impossible, or results in the original purpose of the contract to be so undermined that the actual objective sought to be gained by the contract actions is no longer possible. Even with the potential availability of these common law doctrines, it is preferable to rely on clear contractual language rather than asserting common law defenses.
If you have questions about how the force majeure clause in your contract will be applied, you should speak with an attorney. You may also want to review your insurance policies for provisions limiting their liability for damages caused by such force majeure events. These limitations are common but may deny you coverage at the time you need it the most. Current events may also serve as a prompt for you to be proactive in preparing for whatever the next disaster may be. If your company contracts do not already contain a force majeure clause, or if you believe it is time the existing language be reviewed with greater attention, an attorney will be able to help your business be better prepared to weather future disruptions.