The COVID-19 pandemic triggered catastrophic disruption to business transactions worldwide. Many entities assumed that a “force majeure” clause, meant to relieve performance for unforeseen and unavoidable catastrophes, would come into play. As it turns out, the outcome has involved more sorting shades of gray into black and white.
Also called (wrongly) an “act of God” clause, force majeure language may relieve parties from performing contract obligations when certain unanticipated events happen beyond their control. The aim of a force majeure clause is to expect the unexpected, allocate risk and offer an out for certain or all obligations. Absent a force majeure clause, parties are left to limited common law doctrines that rarely excuse performance.
If a rare meteorological event such as a hurricane or earthquake makes it impossible for a company to deliver promised goods or services on time, a force majeure clause, in theory, could provide relief as an affirmative defense. Those natural disasters are isolated and rare, and force majeure clauses long have included them as common language. A global pandemic causing worldwide commerce to grind to an unprecedented halt was not what contract parties or lawyers had in mind when developing those clauses.
Putting force majeure clauses to test
In the wake of the pandemic, as companies tried to regain their footing by invoking force majeure clauses, they ventured into uncharted territory. Some settled, not wishing to test judicial waters with imprecise contractual language. Others sued, hoping courts would favor them given the obvious circumstances.
Ultimately, some force majeure clauses were enforced, while others were not. The results turned on how the clauses (and their enveloping contracts) were written and applied to the specific facts of the case.
Post-COVID clauses
What we have learned through that experience is that companies need to work with their lawyers to scrutinize how their force majeure clauses are worded. Precise language is of utmost importance.
To build in flexibility during crises, contract parties should craft insightful force majeure clauses, customized with industry-specific events, keeping in mind the following:
>> More potential future disruption caused by, for example, the ever-mutating COVID-19, supply-chain disruption, cybersecurity breach and anthropogenic climate change
>> Adding phrases such as pandemic, public health crisis and government shutdown order to lists that typically include things like tsunamis, volcanoes and earthquakes
>> Incorporating language to cover (or exclude) unforeseeable black-swan events such as upheaval in market prices or conditions
>> Employing flexible standards for excusing performance, with words such as hinder, delay, impair or adversely affect (instead of prevent)
>> Including detailed scope of relief language that defines nuanced liability around temporary nonperformance or underperformance
>> Setting notice requirements and a duty to update status via frequent, frank communication
>> Establishing requirements for mitigating the effects of the event and resuming performance as soon as reasonably practicable
Finally, force majeure clauses are a two-way street: They might be used by the other party to excuse its own performance. Both parties should think through the force majeure language, trying to expect the unexpected, and then allocate risk for the unpredictable, uncontrollable and unavoidable.
Steven Egesdal is a partner in the transactional practice group at Carlsmith Ball LLP. He can be reached at segesdal@carlsmith.com.
