The Force Majeure Clause: Imperative in the Time of Covid

By Christina Saad, Associate

Due to COVID-19 and the resulting stay-at-home orders and regulations, many businesses have been unable to deliver their promised goods and services over the last few months. As a result, there has been a rise in discourse and uncertainty surrounding the question of whether a party that is unable to fulfill contractual obligations because of a pandemic is still obligated to perform.[1] Contractual obligations to perform may be relieved based on the common law doctrines of impracticability and frustration of purpose.[2] However, because these doctrines have very high thresholds, and are thus seldom successful, this article will focus on an alternative basis which businesses may rely on for relief from contractual obligations.[3]  

 A force majeure clause is a clause which is frequently included in contracts to potentially relieve parties of their contractual obligations when unavoidable and supervening events, that are beyond the parties’ control, arise, and prevent or interrupt either party from fulfilling their obligations.[4] In general, courts tend to interpret the language in force majeure clauses narrowly.[5] The severe impact of a pandemic on business activity serves as a strong reminder that it is critical to include comprehensive force majeure clauses in contracts.[6] While contracts entered into before 2020 frequently included unnegotiated force majeure clauses composed of boilerplate language, the COVID-19 outbreak has brought the language of such clauses under increased scrutiny and discussion.[7] As a result of this pandemic, we are likely to see parties negotiate and carefully draft the language in their force majeure clauses.[8]

 Whether a party can successfully rely on a force majeure clause depends on two factors: the language of the clause and how it will be interpreted under applicable state law.[9] That being said, it is not enough for the party to prove that a force majeure event has occurred.[10] The non-performing party also has the burden of showing that the specific event is covered by the clause, that the event caused the party’s inability to perform, and that all conditions contained in the clause have been met.[11] Such conditions frequently include obligations for the non-performing party to: adequately notify the other party that the promised performance cannot be completed on time or at all and diligently attempt to find and implement alternate means of performance.

 While it is advisable to include force majeure clauses in business contracts with the assistance of legal counsel, understanding the fundamental components of a force majeure clause will prove to be useful. A strong force majeure clause should: 

1.               Name the specific events which can invoke the clause[12]

First and foremost, your force majeure clause should anticipate and specify the force majeure events which will invoke the clause, releasing or diminishing obligations.[13] Because courts tend to interpret force majeure clauses narrowly, including a well-thought-out and thorough clause will allow you to have more confidence in times of uncertainty. Here, it is essential to spell out the triggering events within the clause rather than rely on ambiguous terms which would require or allow for further interpretation before the force majeure clause can be enforceable.  

2.              Take into account the specific needs and responsibilities of your business[14]

In order to ensure the force majeure clause is effective, you should take into account the special needs and responsibilities of your business.[15] Think about the types of unprecedented events that would prevent you from accomplishing your work. This can include, among other events, floods, earthquakes, and other natural disasters (sometimes referred to as “Acts of God”) or terrorism, threats of terrorism, and labor strikes (“Acts of Man”).[16] You could also choose to reference “actions” or “orders” by the government.[17] While stay-at-home orders, pandemics, and outbreaks of infectious disease weren’t often listed in force majeure clauses prior to COVID-19, we are likely to see a sharp rise in their inclusion.[18] In deciding whether or not to include widespread public health emergencies in your force majeure clauses, you should assess the impact COVID-19 has had on your business or industry as a whole. 

3.              Be carefully phrased

To reiterate, the way you phrase your force majeure clauses will have a large impact on which circumstances will successfully invoke it.[19] The good news is that you, and the parties you enter into contracts with, do have flexibility on how you choose to structure this clause.[20] For example, while the default rule for force majeure is that actual impossibility be met before the clause can be invoked, you can choose to establish a lower threshold.[21] To do so, you could consider using language such as “when certain circumstances beyond our control arises, making performance inadvisable, commercially impracticable, illegal, or impossible”.[22]

In addition, in some scenarios it may be preferable for both parties to move forward with a commitment, even if an agreed upon quota or deadline cannot be met because of a force majeure event.[23] In order to make this a viable option, you should draft the provision so as to excuse liability associated both with non-performance (cancellation), underperformance (failure to meet minimum guarantees or deadlines).[24] In drafting your force majeure clauses, you may also consider using a catch-all phrase, such as “any other events, including emergencies or non-emergencies”.[25]However, you should be mindful that using a catch-all phrase is unlikely to save parties that have failed to specifically and thoroughly identify triggering events in their clause. However,

Course of Action

Before you enter into your next contract, take some time to alter your force majeure clause in a manner that is better suited to the needs of your business. Other than that, always remember that the most important factor in your decision-making during emergencies should always be the health and safety of everyone.[26] This holds true even if you don’t know whether the force majeure clause in your contract, or the common law principles of impracticability and frustration of purpose, will relieve you of your obligations.[27]

 Also, keep in mind that even if you do have effective force majeure clauses in your contracts, you may want to attempt to negotiate with the other party rather than, or prior to, deciding to rely on the clause in court.[28] This is for several reasons. First, relying on force majeure clauses is inherently fact-specific, leaving room for differing accounts as to whether the clause applies.[29] Second, nonperformance under a force majeure clause may deteriorate business relationships amongst the parties, a situation many businesses may want to avoid .[30] Regardless of your business or industry, it is likely to face risks associated with unforeseen emergencies, such as the COVID-19 pandemic, and it is critical to account for these risks in a forward thinking manner when entering into business contracts. Whether you are looking to avoid performance or simply improve your business’s bargaining position when unexpected emergencies occur, Taylor Law, PLLC is here to assist you.

[1] See for example, David Marmins, Is the Coronavirus a Force Majeure that Excuses Performance of  Contract?, American Bar Association, March 19, 2020, https://www.americanbar.org/groups/litigation/committees/real-estate-condemnation-trust/articles/2020/winter2020-coronavirus-force-majeure-clauses-real-estate-contracts/; see also Iaian Elder, COVID-19: Force Majeure Event?, Shearman & Sterling LLP, March 12, 2020, https://www.shearman.com/perspectives/2020/03/covid-19--force-majeure-event

[2] John Kass, Understanding Force Majeure Clauses, Venable LLP, February 2011, https://www.venable.com/insights/publications/2011/02/understanding-force-majeure-clauses

[3] Kass, supra note 1. 

[4]Applicability of Force Majeure and Related Doctrines in Response to COVID-19, Cooley Alert, March 17, 2020, https://www.cooley.com/news/insight/2020/2020-03-17-applicability-of-force-majeure-and-related-doctrines-in-response-to-covid-19

[5] Kass, supra note 1.

[6] Denis Demblowski, ANALYSIS: Force Majeure Emerges as a Major Force, Bloomberg Law, May 18, 2020, https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-force-majeure-emerges-as-a-major-force?context=search&index=0

[7] Id. 

[8] Id. 

[9] Id. 

[10] Id. 

[11] Id. 

[12] Kass, supra note 1.

[13] Id. 

[14] Id.  

[15] Id.

[16] Id. 

[17] Cooley Alert, supra note 3

[18] Demblowski, supra note 5

[19] Id. 

[20] Kass, supra note 1.

[21] Id. 

[22] Id. 

[23] Id. 

[24] Id. 

[25] Id. 

[26] Cooley Alert, supra note 3

[27] Id. 

[28] Demblowski, supra note 5

[29] Id. 

[30] Id.