Understand the force majeure clause and how it applies to contracts you can’t fulfill due to the COVID-19 crisis
1. What Is Force Majeure?
Force majeure (French for “superior force”) is a common contract provision that essentially frees both parties from liability if performance of the contract duties becomes impossible or impractical, especially as a result of an event that the parties could not have anticipated or controlled.
“Force majeure is a concept that allows a party to seek to be excused from performing their obligations under contract,” says David Adler, an attorney with Adler Law Group in Chicago. As a contractual provision, force majeure can “possibly excuse somebody from performing their obligations, hopefully absolving them of damages and liability,” Adler says.
2. What Events Are Typically Listed in a Force Majeure Provision?
Individual states have different interpretations of force majeure provisions, so you should consult a lawyer in your own state for a more complete understanding. But typically, a contract’s force majeure provision will provide a specific list of events that excuse performance of a contract. Commonly included events include:
- Acts of God
- War, acts of terrorism and epidemics
- Acts of governmental authorities
- Strikes and labors disputes
- Certain types of unavoidable accidents
Courts have generally held a narrow interpretation of force majeure provisions. “Most courts will construe a force majeure clause very, very strictly,” Adler says. “If it’s not listed in the force majeure clause, you certainly run the risk of not being able to absolve yourself of the obligation.”
How courts will interpret terms such as “epidemics” and “acts of governmental authorities” in light of the coronavirus pandemic is still to be determined. “Is a state-issued stay-at-home order an act of governmental authority that is sufficient to excuse you from your contractual obligations? That is the issue you have to look at with your lawyer,” Adler says.
Thomas C. Jardim, an attorney at Jardim, Meisner & Susser in Florham Park, New Jersey, says a claim resulting from the pandemic may hold up. “At the end of the day, if a contract cannot be fulfilled because of a stay-at-home order, or because the supply chain is totally shut down, the party asserting the force majeure provision would have a good argument that it should apply in this unprecedented situation,” he says.
Unfortunately, economic hardship alone is typically not enough to qualify for force majeure. So if the price of materials, labor and shipping have gone up because of the coronavirus crisis, that increased cost to you will likely not be enough to claim force majeure.
Ryan L. Carpenter, an attorney with Carpenter Wellington in Seattle, says the precipitating event causing you to invoke force majeure must make “performance impractical or impossible, not merely unprofitable.” He says actions by local, state and federal authorities with regard to the coronavirus pandemic, including stay-at-home orders and shutdown orders of certain nonessential businesses, will likely qualify as force majeure events. But again, this isn’t certain.
“This will depend on the specific government action and the nature of every business and how the order affects the business,” Carpenter says. “Many states have explicitly put a hold on construction projects, which makes a very strong case for contractors that are explicitly prohibited from working at this time.”
3. When Is Contractual Performance Impractical or Impossible?
To claim a force majeure provision, one most show that the event made performance of the contract impractical or impossible. Therefore, it is important to consider the following:
- Was the intervening act an unexpected occurrence? Basically, should a reasonable person have expected the event to happen?
- Did the occurrence of the event make performance impractical? You need to show a direct cause-and-effect relationship. In regard to the coronavirus pandemic, how has the crisis directly made fulfilling the contract impractical?
- Contractual duties may be suspended only during the event. We don’t know when the coronavirus pandemic will end, but once it does, your responsibilities would come back into effect.
- You cannot create the event that leads to the condition. If you’re the cause of the condition, you cannot claim the condition as a reason to get out of the contract.
- The condition has to be objectively impossible. This means that a disinterested third party looking at the situation would agree that it’s impossible to fulfill the contract’s obligations.
Carl Kanowsky, an attorney with Kanowsky & Associates in Santa Clarita, California, stresses the importance of taking timely steps to mitigate any damage done to your client by not fulfilling a contract. “Many past cases have analyzed force majeure clauses by looking at whether the cause preventing performance was either foreseeable or at least that the actor seeking forgiveness took reasonable and timely steps to mitigate its actions,” he says.
Kanowsky suggests keeping a written record of the ways contract performance is impractical. “It is important to establish that there was nothing the business could have done to avoid default,” he says. “A business should begin immediately keeping a log of all of the steps it has taken in its effort to fulfill its obligations and how it was frustrated by means beyond its control.”
“Unless prescribed in a contract, generally there is no time requirement under the law to claim force majeure,” Carpenter says, “so long as the party seeking relief can establish that the conditions of the force majeure are met for the time period during which force majeure is claimed.”
4. What If Your Contract Doesn’t Have a Force Majeure Provision?
If your existing contract doesn’t include a force majeure clause, all hope is not lost. Most U.S. states recognize common-law doctrines such as “frustration” or “impossibility,” which may be invoked to excuse contract performance under certain circumstances. But business ownerschoosing to invoke these common-law doctrines often face significant hurdles in showing that they should be excused from performing their contract obligations.
Whether or not your existing contract has a force majeure clause, Adler advises resolving disputes through mediation rather than litigation. “I think with everything going on, people are looking for opportunities to meet in the middle,” he says. “Use this as an opportunity to look at these relationships with an eye toward resolution as opposed to opposition.”
Kanowsky agrees that trying to find a resolution with your client is the best approach. “Be proactive and use some foresight,” he says. “Actively seek out alternative ways of satisfying the contract, keep the customer informed and be willing to meet the reasonable customer halfway.”
In general, avoiding court can help save you money at a time when that’s especially important. “As we counsel all of our clients, avoid litigation as much as possible,” Jardim says. “Looking for ways to get to a ‘win-win,’ by delaying performance, for example, rather than totally canceling it, is probably the best way to avoid the inside of a courtroom.”