Businesses across the globe have experienced unprecedented interruptions and closures because of the COVID-19 pandemic. As a result, many businesses are finding it difficult to perform their contractual obligations. Consequently, a common but often overlooked contractual clause is in the limelight: the force majeure clause. Contrary to popular belief, the mere existence of a force majeure clause does not invalidate a legal obligation or provide a “get-out-of-jail-free” card. It instead provides parties with a justification to either delay or cease their performance of one or more contractual obligations. In other words, depending upon the specific language of the provision, the contractual obligations may remain in place. Moreover, the force majeure clause allows the nonperforming party to assert an affirmative legal defense if litigation surrounding an alleged breach was to arise.
What Is Force Majeure?
“Force majeure,” French for “superior force,” is defined as “a provision that excuses a failure to perform resulting from ‘Acts of God’ and other circumstances outside the non-performing party’s control.”[1] The mere existence of a force majeure clause does not automatically mean the parties to the contract can use it. The determination as to whether a clause is enforceable in a specific situation is dependent upon state law. Courts in many states have held that the force majeure clause will not excuse or suspend performance unless the clause in question explicitly includes the specific impediments to performance being asserted by a party to the contract.
When Does It Apply?
Whether you can invoke the force majeure clause in a contract depends on a number of factors. One factor to consider is whether the clause covers the event at play. As a general rule, force majeure clauses are interpreted narrowly. This means that courts require that, for performance to be excused, the specific events being asserted must be unambiguously covered by the clause. For example, contracts that specifically include the terms “pandemic” or “epidemic” are likely to satisfy a court’s desire for specificity regarding nonperformance caused by COVID-19. A clause that refers to governmental actions precluding performance is also likely to be sufficient due to the stay-home and lockdown regulations that have been widely implemented.
In addition, in order for most force majeure clauses to apply, there must be a direct causal link between the external event described in the clause and the party’s inability to perform. In other words, the defense may not be applicable if the event merely makes performance more burdensome but not impossible. Impossibility is a key feature of the force majeure doctrine, and failure to prove the existence of impossibility could render the defense inapplicable.
How Does the Application of Force Majeure Differ from State to State?
In addition to using very specific terms, it is important to analyze the context of the situation in light of the jurisdiction governing the clause. The elements for establishing a valid force majeure defense vary by state. In some states, the catch-all phrase “Acts of God” may be interpreted narrowly to only include events similar in nature to the events listed in the clause. For instance, where a force majeure clause specifically mentions “tornados, earthquakes, and floods,” the clause will be interpreted to only include other similar natural disasters.
Another area where state laws may differ pertains to the “reasonable diligence” requirement. Essentially, the party attempting to invoke the force majeure clause must show that they exercised reasonable diligence to avoid the interruption. In many instances, parties must also demonstrate that they took reasonable steps to mitigate the damages caused by the force majeure event. Because of the variations in state law regarding the application of the force majeure defense, business owners must understand their state’s interpretation and application of the defense before asserting it.
Next Step
If you are a party to a contract and are contemplating nonperformance, call our office to discuss the applicability of the force majeure clause in your specific situation. We are for you. An analysis of your agreement can help you assess the legal risks you may face and determine the best course of action moving forward.
[1] Charles M. Fox, Working with Contracts: What Law School Doesn’t Teach You 278 (2nd ed. 2008).