Mark Stall – mstall@stall-legal.com
October 1, 2021
The COVID-19 pandemic and its aftermath have and will likely continue to reverberate through the economy well into 2022 and possibly beyond. Few businesses have been spared having to deal with labor shortages, supply chain disruptions and raw material and product shortages. Unfortunately, many experts predict that climate change and the resulting hurricanes, flooding, water shortages, disruptions in the electricity grid and droughts may have an even greater impact on supply chains and how businesses operate.
It is ironic that a provision often considered boilerplate and buried at the end of a contract suddenly has become a critical tool in how a company manages a significant disruption in its operations and supply chains. This article highlights the importance of management understanding the role of force majeure clauses and making sure that the company’s contracts contain well thought out force majeure provisions that address the company’s unique needs.
Force Majeure Provisions
Force majeure clauses are found in commercial contracts and excuse a contracting party’s nonperformance when unforeseen and unavoidable circumstances prevent such party from meeting its contractual obligations. For a situation to be considered a force majeure, the event must qualify as a force majeure under the terms of the contract, the risk of nonperformance must not have been foreseeable and not able to be mitigated, and performance of the contract must be impossible (unless a specific jurisdiction or contract specifies a different standard).
In most states, the concept of force majeure only exists if the clause is included in the contract. In addition, what constitutes a force majeure is determined on a case-by-case basis based on the contract language, applicable law and other relevant factors. For example, the COVID-19 pandemic may qualify as a “natural disaster” under a force majeure clause if triggered in March 2020 at the onset of the pandemic but may not be considered a qualifying force majeure today.
Over the years, courts have used conflicting analyses to reach disparate conclusions regarding the existence of a qualifying force majeure event. However, one constant has been the determination that a force majeure clause is an allocation of risk between contracting parties that will not be second guessed by the Court even in the event of a disaster. As a result, contracting parties need to pay particular attention to the drafting of the clause.
What Type of Clause Works Best?
The force majeure clause is a risk-shifting provision, and as such, should be drafted to address a client’s unique needs. Issues that should be considered include –
Definition of Force Majeure – Should the clause only refer to a specific list of qualifying events such as war, strikes, natural disasters, riots, acts of government, plagues, and epidemics, or should the qualifying events include “catch-all” provisions, such as “acts of God”, “national emergencies”, “natural disasters” and “acts beyond the control of the parties.” The COVID-19 pandemic is an example of an event that is not identified in the specific list of qualifying events and will be the subject of a court’s interpretation as to whether it qualifies as an “act of God” or “natural disaster.”
Notice – Notice by the affected party to the other contracting party is required to invoke the protection of a force majeure clause. However, notice requirements are contract specific and vary widely in their requirements. When is notice due? Is a force majeure claim time barred if notice is delayed? Is the affected party required to provide updates regarding how long the force majeure is expected to last or provide periodic updates?
Impossible or Impractical – Is the clause intended to excuse the affected party’s performance only when performance is impossible, or where performance becomes costly and difficult.
Length of Time – What period of time must pass before an affected party has the right to declare the existence of a force majeure.
Suspend vs. Cancel – Force majeure clauses may specify a wide range of rights that the affected party may be vested with as a resulting of the force majeure event, including temporary suspension of performance obligations during the pendency of the force majeure event or the right to cancel the contract.
Contracts With No Force Majeure Clause
For contracts that do not contain such a force majeure clause, an affected party seeking to be excused for nonperformance may still attempt to rely on the common law doctrines of impossibility, and in some jurisdictions, the doctrine of impracticability. These doctrines will excuse nonperformance if a party can demonstrate the following – (a) an unexpected intervening event occurred; (b) the contracting parties’ agreement assumed that such an event would not occur; and (c) the unexpected event made performance of the contract impossible or impracticable.
Conclusion
The unprecedented events of the last 20 months and the predictions of future uncertainty with regard to matters that we have taken for granted in the past, would support a careful review of force majeure clauses in your supplier and customer contracts. A carefully drafted force majeure clause can be the difference between a defense to a breach of contract claim and facing a costly liability and damages claim.
Stall Legal welcomes the opportunity to assist clients with the review and drafting of all types of commercial contracts.