Of all the questions which we are receiving from clients these days, “force majeure” is the one that can be hardest for clients to grasp and lawyers to give definitive answers on. Although little known and seldom used, this legal concept can be tremendously helpful to prevent a costly contract dispute when a party cannot perform as expected. It’s the equivalent of a “get out of jail free” card in a Monopoly game.
Force Majeure Means More Than “Act of God”
A force majeure clause is one way for parties to a contract to allocate risks if they cannot perform due to a “superior force” or an act of God. The contract must list events which cannot be anticipated or controlled by a party as reasons to excuse, or delay, performance by that party without breaching the contract.
The list of events beyond the control of the parties can be long and varied: inclement weather, natural disasters, acts of God, strikes, labor disputes, equipment failures, power failures, civil disturbances, war, terrorism, etc. After the H1N1 flu pandemic in 2009, these lists were sometimes expanded to include epidemics, pandemics, and government ordered shutdowns and quarantines. Many of the events listed in modern force majeure clauses are in fact emergencies and circumstances which are the product of human conduct rather than of God or nature.
A good force majeure clause should be tailored to a particular industry and the unique types of challenges that the parties might face.
Will The Contract Hold Up?
Not all contracts are created equally. When interpreting force majeure clauses, the courts look to the actual language of the contract. The plain language is construed narrowly. The essential questions are:
- Did the parties consider that this type of event would occur?
- What outcome did the parties intend?
- Did the parties memorialize their intent in a force majeure clause, and are the issues allegedly preventing performance of the contract specifically listed in the clause?
- Was it the SARS-CoV-2 virus that caused the issue or was it caused by actions of the government, a lack of customers, supply chain issues, etc.?
Many contracts specify that when an emergency event occurs, performance is merely delayed rather than excused completely. Some contracts also require giving notice to the other party(ies).
Related concepts in contract law include the common law doctrines of frustration and impossibility of performance, impracticability, and non-profitability. While these terms may sound like synonyms, the courts have interpreted them to have very different meanings and application when it comes to excusing performance. Simply losing one’s anticipated profit on a contract is an excuse which is not going to win the day if the other side is insisting on performance.
No matter what the contract says, it is always possible that both sides “work out” a solution which wasn’t written into the original contract.
Good Facts Often Generate Better Outcomes
Whether you are the buyer or seller of goods, services or real estate; a landlord or tenant; or even an employer or employee facing a contractual dispute triggered by an act of God or circumstance beyond your control, we will want to work with you to identify the unique facts of your contract in order to fully assess your rights, options and strategies. The following questions will help you get the most value out of the first conversation:
- Give the lawyer your full contract or lease and point to the force majeure clause if there is one.
- How is the performance deficient?
- Is the performance delayed, partially complete, not to standard, or completely absent?
- What is the effect of the non-performance? List all kinds of financial, operating, and reputational effects.
- What event caused the non-performance? Was it, for example, the coronavirus pandemic itself, a government order, a lack of supplies needed to produce promised goods?
- Could the parties have predicted the event?
- Have the parties mitigated the losses or other effects of the non-performance? Could they have made the consequences less severe?
- Is the performance truly impracticable or impossible or just not profitable?
- Is the business partially functioning, but not at capacity? If so, which customers are receiving goods/services as promised?
- Did the seller notify the buyer of delay?
- Is the performance so important to the underlying premise of the contract that without the performance, the parties wouldn’t have entered the contract? Did the parties include language to this effect?
We encourage clients to review their contracts now and contact us with questions. Ask yourself which contracts your business needs to immediately address due to the COVID-19 pandemic and how will you learn from this crisis to approach new contracts differently. To schedule a consultation, please contact Ron Lyons at rlyons@mcmillanmetro.com.
