COVID-19 Advisory – Renewed Focus on Force Majeure Clauses
March 22, 2020
More has probably been written in the last three weeks about force majeure clauses than in the prior decade combined. Long relegated to the back end of contracts amongst other rarely read, much less invoked, provisions, force majeure (also known as impossibility) clauses have re-emerged in the COVID-19 era as potentially important risk-allocation mechanisms. If found to apply in a set of circumstances, these clauses may provide an absolute defense to liability by a party who terminates a contract over the objections of the other party.
The concept of a force majeure clause embodies an inherent contradiction. On the one hand, such a clause generally applies only to events that are unforeseeable to parties at the time of contract formation. On the other hand, many courts will only enforce such a clause if the clause lists a specific event or category of events that subsequently occurs and makes performance by at least one of the parties impossible. For example, it is probably safe to say that the vast majority of force majeure clauses list Acts of God as grounds for termination. Thus, it is not impossible for parties to anticipate that Acts of God may occur during a contracting period, otherwise they wouldn’t be listed in a force majeure clause. But if they foresee a specific Act of God at the time of execution (say a tsunami is in the forecast), a force majeure clause may provide no shelter to a party whose performance may be rendered impossible by such an event.
So what is a party to do? For clients who may wish to invoke force majeure clauses to terminate a contract and be excused from performance and liability, it is essential to look closely at the express language of the provision itself. That is what a court will do if the matter were to be litigated. Because a properly invoked force majeure clause may result in a complete defense to liability flowing from a one-sided contract termination, courts do not liberally interpret these provisions. Accordingly, clients should understand (1) what force majeure events are actually and arguably covered; (2) whether the listed force majeure events are illustrative or exhaustive; (3) which party may invoke the clause on the occurrence of a force majeure event; and (4) what are other potential remedies in the event of termination.
We have found that while force majeure clauses often involve boilerplate, they may vary widely in what they allow the parties to do, especially by industry. It is essential to carefully review the actual language of the contract. Here are some issues that parties should be aware of when reviewing their contracts:
- Are the grounds for invoking the force majeure clause limited to events specifically written into the clause? Or are the listed events non-exhaustive examples of bases for termination?Be on the lookout for modifying terms that suggest the latter, e.g., “such as” or “including.” These modifiers are earmarks of a broader force majeure clause.
- Does the force majeure clause contain a catch-all provision following a list of events that expands its scope to include other events beyond the reasonable control of the party impacted? Examples of catch-all provisions include “other emergencies” or “similar events.”
- Is performance impossible, as opposed to more burdensome or economically more difficult? We are advising clients on situations arising from the COVID-19, and specific facts regarding the ability or inability to perform are critical.
- Was the force majeure foreseeable, and has the party invoking force majeure taken steps to mitigate the effects of nonperformance?
- Who can invoke the force majeure clause? Some clauses are written so that only the party whose performance has been rendered impossible by a force majeure event (Party A) can invoke the clause. In these provisions, Party B would not have standing to terminate the contract based on Party B’s perception of Party A’s ability to perform in the face of the force majeure event. Other clauses may be written so that either party may invoke the clause.
- While epidemics and pandemics may not be listed as force majeure events, they may nevertheless trigger “restraint of transportation” or “governmental acts,” which often are express events in force majeure clauses. Thus, if governmental activity in response to epidemics or pandemics renders performance impossible, a party may be able to invoke a force majeure clause.
- Epidemics and pandemics are not considered to be Acts of God, which have generally been interpreted to cover natural disasters. Some contracts, however, may define Acts of God.
- A party wishing to invoke a force majeure clause should do so promptly in writing to the counter-party. Do not presume that force majeure clauses are self-executing. A number of them contain notice provisions that should be carefully followed.
- What are remedies that a force majeure clause may provide? Some clauses may provide that if an event of force majeure lasts more than a specific period of time, the contract is automatically terminated. Other clauses may be silent on this topic or they might even provide for a temporary suspension of performance during the force majeure event and require parties to resume performance afterwards.
The law that governs the interpretation of the contract is also very important. The application and enforcement of force majeure varies from state to state and country to country. If the contract does not include a force majeure clause, a court will not read one into the contract. While there exist legal doctrines that may otherwise excuse performance in the face of extraordinary events, such as the doctrines of impracticability or impossibility in common law jurisdictions, and similar doctrines in civil law countries, these doctrines are often not easy to prove.Foley Hoag has formed a firm-wide, multi-disciplinary task force dedicated to client matters related to the novel coronavirus (COVID-19). For more guidance on your COVID-19 issues, visit our Resource Page or contact your Foley Hoag attorney.