COVID-19—How to Interpret Force Majeure Clauses
Posted by Legalease Solutions on 22 Apr, 2020
Force Majeure, literally translated, means superior force. In contracts, a force majeure clause defines the scope of unforeseeable events that might excuse non-performance by a party. However, at its core, to excuse non-performance, the non-performing party bears the burden of proving that the event was beyond the party’s control and without its fault or negligence.
The requirements for establishing the existence of a Force Majeure event—an event or circumstance that prevents or impedes a party’s performance of its contractual duties—is usually set out separately in a Force Majeure clause in commercial contracts. These clauses vary from contract to contract. It is essential to check the specifics or language of your clause. The force majeure provision in some contracts might be labeled Act(s) of God or Vis Major. Language governing delay in performance or default might also speak to force majeure.
When performance of a contract becomes impossible or impracticable due to occurrence of an unforeseen event (force majeure), the party successfully invoking force majeure is typically completely relieved of its duty to perform its impeded contractual obligations and from liability for damages for breach of contract. In some cases, the party may also be permitted either delayed performance or part performance.
However, it must be noted that economic hardship or fall in consumer demand do not constitute force majeure. In a situation where an event substantially upsets the equilibrium of the contract subjecting a party to an economic hardship, the party will only be entitled to renegotiate the contract and in certain cases to obtain its adaptation to the changed circumstances.
Points to Consider Before Invoking the Force Majeure Clause
Determine the Force Majeure Provision in your contract
In the absence of a Force Majeure provision in a contract or language that speaks to it, it usually cannot be implied or assumed. The law applicable to the contract will be relevant and parties would be well advised to seek legal assistance for guidance. The concept of Force Majeure is not universally recognized, and different legal systems provide different solutions where an impediment prevents performance of a commercial contract.
Check if a pandemic is one of the enumerated events included in the provision
Specifically mentioned. Epidemics and pandemics could be classed as “biological agents,” which is sometimes found in a force majeure clause. However, if such terms are not specifically mentioned the language of the contract determines if COVID–19 can be considered as a force majeure event.
If the contract specifies an epidemic outbreak as a specific event under the force majeure clause, the parties may be relieved of performance on the occurrence of the event.
Not mentioned. If an epidemic outbreak is not listed as a specific force majeure event, it can be read under the act of God. An act of God is defined as “[a]n overwhelming, unpreventable event caused exclusively by forces of nature . . . .” The definition has been broadened by statute to include all natural phenomena that are exceptional, inevitable, and irresistible, the effects of which could not be prevented or avoided by the exercise of due care or foresight. Most courts have held in the past that a person’s illness or death is an act of God.
Catch-all phrases. Other language to look for is a catch-all phrase. Often, the provision will include language such as “including, but not limited to,” “any other cause,” “any similar cause,” or “any like cause” in an effort to catch events that the parties did not foresee at the time they drafted the provision. If the force majeure clause contains a catch-all phrase, the legal maxim of ejusdem generis may be applicable. Ejusdem generis is a canon of contract construction in which the catch-all phrase will be interpreted to include only items of the same class as those listed. Thus, if COVID–19 is found similar to other events listed under the force majeure clause, it may be considered a force majeure event.
For instance, any mention in the force majeure language of labor shortages, supply chain interruptions, or unspecified events of general and exceptional disruption beyond the control of the party with language such as “…and any other Act of God” could potentially be relied on.
Other delay provisions. One may also be able to find relevant information under other contractual clauses namely the delay provisions, material adverse event or change provisions, limitations of liability, exclusions, provisions dealing with timeliness in any way, price adjustment or recalculation, or alternative forms of performance.
COVID-19 pandemic might include “epidemic, pandemic or other national emergencies” or “order of necessity of the government.” If such language is included in your provision, you may have good cause to declare a force majeure event.
Once the relevant provisions have been identified, the next step would be to determine whether other requirements for invoking the Force Majeure provision have been fulfilled
The underlying test for many Force Majeure clauses requires the party invoking the clause to prove that:
- the impediment is beyond the party’s control;
- the impediment could not reasonably have been foreseen when the contract was concluded; and
- the effects of the impediment could not have been avoided or overcome by the party
Possibility of dispute that a Force Majeure event has occurred
- In case of a dispute, it might be helpful to negotiate with your contractual counterparty to vary the contract in view of the pandemic and to explore other options to mitigate the consequences of non-performance. However, if the other party disputes there has been a force majeure event, keep documentary evidence of the disruption in your ability to perform. Once the matter reaches the court or any other chosen forum for dispute resolution, the dispute will be determined based on the contractual wording of the applicable clause.
When the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.
Other Relevant Contract Law Doctrines
If a contract does not include a force majeure clause, the parties should consider other legal doctrines that may apply to excuse a party’s nonperformance:
Doctrine of Commercial Impracticability
The doctrine of commercial impracticability states that a party may invoke the doctrine of commercial impracticability as a defense to performance of a contract when it can show that it had the ability to perform a contract at the time it entered into the contract, but that circumstances changed due to events beyond the party’s control, which rendered performance commercially impracticable.
Doctrine of Impossibility of Performance
The doctrine of impossibility of performance provides that when a condition which is part of a contract becomes impossible for a party to perform, that condition will be excused.
Doctrine of Frustration of Purpose
The doctrine of frustration of purpose excuses performance by a party where the value of the performance to at least one of the parties, and the basic rationale recognized by both parties entering into the contract, has been destroyed by a supervening and unforeseen event.
The Restatement of Contracts requires that three criteria must be met before courts will find frustration of purpose:
- The purpose that is frustrated must have been a principal purpose of that party in making the contract . . . The object must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense.
- The frustration must be substantial. It is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss. The frustration must be so severe that it is not fairly to be regarded as within the risks that he assumed under the contract.
- The non-occurrence of the frustrating event must have been a basic assumption on which the contract was made.
In Langham-Hill Petroleum Inc. v. Southern Fuels Company, the government of Saudi Arabia, in an attempt to regain its share of the world oil market, caused a collapse in world oil prices that made appellant Langham’s fixed-price contract to buy oil from appellee disastrously unprofitable. Langham breached this contract and argued that a force majeure clause found in the contract should validate his refusal to honor his contractual obligations.
The force majeure clause in the Langham contract applied if a party was rendered unable to perform by a “cause of any kind not reasonably within its control,” including, among other things, "any restrictions or restraints imposed by laws, orders, rules, regulation or acts of any government or governmental body or authority." The Langham court found that the act of the Saudi government did not make the appellant unable to perform. It merely made performance unprofitable. It should also be noted that this effect was quite indirect, unlike an order embargoing timber or restricting its removal. "A force majeure clause is not intended to buffer a party against the normal risks of a contract. The normal risk of a fixed-price contract is that the market will change, (emphasis added)" wrote the court.
In Wuhan Airlines v. Air Alaska, Inc., Air Alaska attempted to excuse its failure to deliver an aircraft to Wuhan under a lease by relying on the lease’s force majeure clause. However, the court pointed out that the clause excused performance for disasters such as an explosion, sabotage, flood and other events resulting in the destruction of the aircraft. The court held that a dispute between the parties did not constitute an event specifically listed in, or even one similar to those listed in, the force majeure clause (emphasis added). Accordingly, the court ruled that the force majeure clause did not excuse Air Alaska’s failure to perform.
In TEC Olmos, LLC v. Conocophillips Co. TEC Olmos entered into a farmout agreement with ConocoPhillips Company ["ConocoPhillips"] to test-drill land leased by ConocoPhillips in search of oil and gas. The contract set a deadline to begin drilling and contained a liquidated damages clause that required TEC Olmos to pay $500,000 if it failed to begin drilling by the specified deadline.
The contract also contained a force majeure clause that listed several events that would suspend the drilling deadline, followed by a "catch-all" provision for events beyond the reasonable control of the party affected. The court found that the driller’s failure to perform was not excused by the force majeure clause of the contract, because there was no specific provision in the force majeure clause making a downturn in the market a force majeure event, and a catch-all provision required a showing of unforeseeability (emphasis added), which the driller did not make.
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 International Chamber of Commerce, ICC; Edited by Fabio Bortolotti & Dorothy Ufot, Hardship and Force majeure in International Commercial Contracts: Dealing with unforeseen events in a changing world (2018), https://library.iccwbo.org/content/clp/BOOKS/BK_0047/clp-hfmicc.htm (last visited Apr 20, 2020)
Wuhan Airlines v. Air Alaska, Inc., 1998 U.S. Dist. LEXIS 15529 *7-8 (S.D.N.Y. Oct. 2, 1998); https://www.natlawreview.com/article/covid-19-force-majeure-clauses-and-contractual-nonperformance