This Coronavirus Pandemic may spark a run on “Force Majeure”
It is virtually guaranteed that the Coronavirus pandemic will trigger one of the most overlooked and rarely used provisions in contracts – the “Force Majeure” clause. What in the world is “Force Majeure” you say? It is a provision in many kinds of contracts that provides parties with an excuse for performance when something crazy happens, like a global viral pandemic.
It isn’t unusual for contracting parties to breeze over, ignore, or even leave a Force Majeure clause out of a contract. This is because they are triggered by very unusual events. Force Majeure is a French phrase that translated literally means “superior force.” The purpose of including this clause in a contract is to give parties an excuse for non-performance (and hopefully a clear result) when performance is interrupted, or made impossible, by causes outside of their control.
Here is an example of a simple Force Majeure clause:
Force Majeure. Neither Party shall be liable for any failure or delay in performance of this Agreement to the extent the failure or delay is caused by an occurrence beyond a Party’s reasonable control, including acts of God, government restrictions (including, without limitation, the denial or cancellation of any export or other necessary license), wars, epidemics, strikes, hurricanes, floods, earthquakes, and insurrections, for so long as such occurrence continues.
There are many variations on this clause. It might provide details about resuming performance when the interruption is over, revising the contract so the deal can be salvaged, or consequences for specific events. When the clause is triggered, it gives the parties an excuse and defense to a breach of contract claim.
The Force Majeure clause has two close cousins in contract law:
- The Doctrine of Impossibility – this principle is applied when performance of the contract has become literally impossible. For example, in the case where this doctrine originated, a party rented a music hall for presenting musical performances. Before the performances began, the hall burned to the ground. Since the hall no longer existed, the party renting the hall was excused from the contract.
- The Doctrine of Impracticability – this principle is applied (rarely) when performance is still literally possible, but would be extremely burdensome (i.e., impracticable). An example would be a concrete company that agrees to mine all of its requirements for gravel from another’s tract of land. The concrete company eventually hits the water table of the tract, and then moves its mining operation to someone else’s tract. This was the case that originated the doctrine, and the concrete company was excused from breaching the mining contract.
Both doctrines generally require (i) that the problematic event occurs after the contract was made, and (ii) be a core assumption underlying the performance of the deal.
Never in my lifetime has there been such complete and utter chaos as the panic being caused by the Coronavirus. Businesses are shutting down, travel is being restricted, events are being canceled (some of which are years in the making) – the list just goes on. This will definitely have consequences.
There are two areas to consider the impact of Force Majeure and the doctrines of impossibility/impracticability:
- Your contracts where the other side is unable (or unwilling) to perform their side of the deal.
- Your contracts where you are unable (or unwilling) to perform the deal.
Look at the details of the Force Majeure clauses in your contracts – they may explain the consequences when performance is prevented by something like the current pandemic. If not, carefully consider exactly what performances can and cannot be completed. This is a very fact-specific analysis. And it is always worth considering whether contacting the other side to discuss revising your contracts to keep a deal from falling apart completely.