It's Time to Dust-off the "Force Majeure" Clause in your Contract
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To borrow a biblical phrase, “where two or more are gathered” these days, you can bet they’re discussing coronavirus, or COVID-19. Well, “gathering” may not be taking place anymore, given our new social-distancing efforts, but to state the obvious, the topic is consuming our lives. The virus’ outbreak has already produced consequences in various ways, including social behaviors, school closures, business interruptions, event cancellations, and suspended sporting events at all levels. The disruptions are affecting our personal lives and our businesses, and may continue to do so for some time.
If you, or your business, is party to a commercial contract or agreement, you already know that many of these agreements include a contractual clause commonly referred to as Force Majeure clause, a French phrase that translates, literally, to “superior force” or “superior strength”. The term Force Majeure has no contractual meaning in and of itself, so these clauses typically list specific circumstances that will excuse one or more of the contracting parties’ delay in performance or non-performance . Thus, the clause creates exceptions to what might otherwise be deemed a default under the contract.
Force Majeure clauses are used in a variety of legal documents, including but not limited to, construction contracts, consulting agreements, personal service contracts, construction loan agreements, supply agreements, manufacturing contracts, insurance policies, and many others.
Given the extraordinary circumstances taking place around the world, and the uncertain ripple effects that these disruptions will cause to our lives and businesses, the applicability of a contract’s Force Majeure clause may very likely come into play with respect to a host of business transactions. Accordingly, there are a number of questions that must be addressed before it can be determined whether current global events will be a valid reason to excuse contract performance by one or more of the parties.
Q: Are all Force Majeure contractual clauses the same?
A: Unfortunately, no. As the saying goes, “if you’ve seen one Force Majeure clause, you’ve seen one Force Majeure clause.” Most contracts define Force Majeure with similar language– i.e., acts of God, natural disasters, war, riots, strikes or work stoppages, embargos. Other contracts go further and include events such as “epidemics”, “acts of civil or military authorities” and, in some form or fashion, the general “any extraordinary event, circumstances or other causes beyond the reasonable control of a party whose performance is affected”. Also, the clauses seem to have evolved in response to past events. After September 11, 2001, contract drafters began to include “acts of terrorism” as events that could justify non-performance. Following Hurricane Katrina in 2005, we began to see many Force Majeure clauses in local contracts specifically include “hurricanes or flooding,” even though “natural disasters” was often already a part of the contract language. Suffice it to say, a careful review of your contracts is imperative. A survey of these clauses reveals how differently each are drafted, and even though expressly stated, how complicated it is to precisely and accurately describe some events in a way that provides total clarity.
Q: If a contract does contain a Force Majeure clause that includes “epidemic” or some form of the “other causes beyond the reasonable control of a party” language, does that mean one or more of the contract parties do not have to perform, as a general rule?
A: Not necessarily. First, it should be noted there is not much jurisprudence in the U.S. that address “epidemics” as a Force Majeure event. So the courts have not, to date, had an opportunity to provide clear interpretation or guidance. That is likely to change soon. Second, there needs to be a real causal connection between the occurrence of a Force Majeure event and a party’s ability or inability to perform under the contract. By way of an over-simplified comparative example, consider today’s situation, where there is undoubtedly an “epidemic” of COVID-19 occurring. Most homeowners cannot simply stop paying monthly home mortgage payments even if the loan documents contain language that includes “epidemic” as a Force Majeure event. This is because the Force Majeure event, as expressly stated in the contract, has not directly created an effect that excuses the homeowner’s performance – to pay monthly installments to the mortgage company. In contrast, if a public school district engages a consultant to observe and evaluate students’ use of a new technology in the classroom, and the contract contains similar Force Majeure language, the government’s decision to temporarily close all public schools because of the epidemic precludes the consultant from completing the evaluation.. Very likely, the Force Majeure clause would excuse the delay in the consultant’s performance.
In between these very simple examples are countless real-world situations that will likely arise as businesses try to predict their respective futures.
Q: A Force Majeure provision seems to be a fair and reasonable concept, so for those contracts that contain the clause, there’s nothing for any of the contract parties to worry about, correct?
A: Oh, if it were that simple! While it seems to be a fair proposition that one or more contracting parties should not be deemed in default of a contract if real events occurred that were “beyond the reasonable control” of that contracting party, there is the other side of the coin to consider. One of the main reasons to enter into a written contract is so that the contracting parties can rely on each other’s performance within the time periods set forth in the contract. When one party does not perform, even if a reasonable excuse exists, the risk created by the non-performance is suddenly shifted to other parties to the contract. In other words, the other contract party or parties must absorb the effects of the non-performing party’s inability to deliver whatever the contract required. This may have little to no effect at some levels of business, but one can easily see how the repercussions could become exponential as layers of business relations become involved. Consider the timely example of an equipment manufacturer that is party to a supply contract with the Chinese producer of a raw material used in the manufacturing process, and these parties’ supply contract includes a Force Majeure clause that excuses the raw material producer from delivering the materials to the equipment manufacturer in the event of a government-ordered work stoppage. Unless the equipment manufacturer has an alternative supplier for the raw material, it cannot manufacture the equipment it needs to timely fulfill distribution agreements it may have in place with other parties, which will result in penalties for the delay. If the distribution agreement does not contain a similar Force Majeure clause, the equipment manufacturer may be forced to bear the loss of the raw material delay because the Force Majeure clause shifted the risk, and the ripple effect may even reverberate in other directions beyond these commercial relationships.
As we all are dealing with the unknown these days, there will be intense focus on the ripple effects throughout the global economy.
Q: My contract does not contain a Force Majeure clause. Is there anything else that applies?
A: In Louisiana, perhaps yes. The Louisiana Civil Code may apply to business relationships in the absence of a written contract or in situations when the contract does not address a situation. Specifically, Louisiana Civil Code articles 1873 through 1878 deal with excusing contract performance when a fortuitous event makes performance impossible. There are several judicial interpretations in construction and sales situations, which generally analyze whether the impediment was reasonably foreseeable or a known business risk at the time of contracting. Performance is not excused typically because an impediment made contract performance more difficult or onerous. Performance has to become nearly impossible for a party to be able to dissolve a contract and the obligations arising from it. Short of dissolution, reciprocal partial performances are often an acceptable alternative.
There is no question that responses to the coronavirus will continue to evolve as they have daily for the past few weeks, and existing commercial transactions will be affected. Some parties will undoubtedly try to take advantage of these excusable delays in performance. It is obviously impossible to analyze every possible situation and answer all questions regarding Force Majeure clauses in this short introductory piece. We are here to help if this overview leads you to more questions or concerns.