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ANALYSIS: Force Majeure Emerges as a Major Force

May 18, 2020, 9:28 AM

The scope of supply-chain disruption from the Covid-19 outbreak has highlighted the importance of a well-crafted force majeure clause. It’s also brought this sometimes-overlooked contract provision out of the dark obscurity of “fine print” and into the light of increased scrutiny and discussion in the Covid-19 legal news world.

So, what is force majeure, when does it apply, and how is it being shaped and applied in light of the novel coronavirus pandemic?

Force Majeure Means What the Parties Say It Means

Force majeure means “supervening cause or force.” In the United States and other common-law jurisdictions such as the United Kingdom and Canada, force majeure is a creature of contract. It is part of the parties’ agreement, providing that if a party’s promised performance is prevented or made impossible by an event beyond its control, performance is excused or delayed and the party suffers no contractual liability while the force majeure event continues. Whether a party is entitled to rely on a force majeure clause to shield it from liability for nonperformance depends on the wording of the clause and how it will be interpreted under applicable state law.

Force majeure, then, means whatever the parties agree that it means, as evidenced by the words they’ve chosen to include in their contract. More broadly speaking, these clauses generally do not reflect statutes, the Uniform Commercial Code, or case law: They reflect the will of the parties.

Unfortunately, prior to the current crisis, force majeure clauses were generally not highly negotiated by the parties. The clause was almost always located at the end of the written agreement, in a miscellaneous or boilerplate section that was copied, without change, from prior forms or taken from past transactions on which counsel worked. Little thought went into whether the wording was appropriate for the current transaction or needed to be changed to reflect new or different risks.

Most force majeure clauses list a number of natural causes (so-called “acts of God,” such as hurricanes, floods, etc.) and man-made events (war, terrorism, strikes, government orders, quarantine, etc.) together with a “catch-all” category: “any [other/similar] cause outside the control of a party.” Prior to 2020, most force majeure provisions did not expressly list “epidemic,” “pandemic,” “outbreak of infectious disease,” or “stay-at-home” orders as an event that triggered the relief (excuse, delay, suspension, termination, etc.) specified in the clause. As a result, businesses are now asking their legal counsel for answers about whether the pandemic and/or the governmental shutdown orders constitute an “act of God” or “a cause outside the control of a party.”

Insurers Anticipated the Pandemic

Business interruption insurance policyholders are likewise challenging whether shutdowns resulting from the pandemic trigger coverage for losses that continue to rise. Many insurers modified the language of their policies during past experiences with Ebola and previous coronavirus outbreaks to expressly exclude coverage for such causes and/or to limit coverage to losses stemming from physical property damage.

Clarity From Litigation or Improved Drafting?

Post-pandemic litigation will undoubtedly attempt to clear the waters somewhat, and a number of cases have already been filed. What is certain is that force majeure clauses in new contracts will address the issue more directly. The list of force majeure events will either specifically include pandemics and related terms or expressly carve out such events from the set of risks that the parties agree could affect their deal. Force majeure clauses will become more highly negotiated and new market standards will appear—which will then likely be further refined upon the arrival of the next health or climate change emergency.

Expanded Force Majeure Clauses

Recent contracts have begun to include more expansive force majeure clauses that expressly address pandemic events. And other contract clauses have also emerged from the obscurity of boilerplate and miscellaneous clauses, such as Limitation of Liability, Insurance, Governing Law, Remedies, Compliance with Law, and Termination provisions.

Will new drafting solve the problem of what constitutes force majeure? Probably not. Force majeure clauses are by nature heavily fact-dependent. For such a clause to stick, not only must the parties have identified in their contract the general or specific risk that entitles the party to force majeure relief, but the occurrence of that general or specific risk must in fact be the cause preventing the party’s performance.

The party declaring an event of force majeure has the burden of showing not only the occurrence of the event and its causal relationship to the party’s inability to perform, but also that it complied with any obligation or condition contained in the clause on notification, diligence to find and implement alternate means of performance, and remediation of the source of the contingency.

All of these are fact-specific, providing room for the parties to offer differing accounts of whether the clause applies and has been validly invoked. For this reason—and also due to the widespread effect of the pandemic’s disruption on commercial relationships—parties that survive the downturn and are able to rebound may look to re-foster their business relationships through negotiation and accommodation rather than resorting to litigation.

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