This 3-part series provides the basics on evaluating force majeure clauses likely found in the agreements and contracts used by privately held and family-owned small and medium sized companies.
Part 1 describes the steps to determine whether your agreements contain applicable force majeure language; Part 2 takes a deeper look into the definition of the terms in typical force majeure clauses and whether the coronavirus allows nonperformance; and Part 3 guides you through the decision process on whether invoking a force majeure clause is best for your situation.
Force Majeure Distinctions that Companies Need to Know
[Part 2 of 3 in the series “Contracting & Coronavirus”]
We are over a week into social distancing due to the coronavirus (aka COVID-19), and students are schooling from home, the grocery store shelves remain relatively empty, and non-essential physical business locations are closed. It is difficult to find a company that is not feeling the effects of the pandemic. As we come together as a country to make it through these challenging times, our business owners, presidents and CEOs must carefully navigate their company through available options. Some of these decisions will affect their agreements with other struggling companies, which is why it is vitally important to thoroughly understand and comprehend the nuances among force majeure clauses in typical agreements.
This article will help the Owner, CEO, President, and General Counsel to identify nuances in force majeure language. Here are the most important distinctions found in typical force majeure language:
Distinction #1 Timeliness of the Agreement.
For an event to be considered an “Act of God,” and especially for the party invoking force majeure, the event must have been unforeseeable. In the legal world, “unforeseeable” means that an ordinary person could not have reasonably anticipated or expected the circumstances (see https://dictionary.findlaw.com/definition/unforeseeable.html).
Would an ordinary person expect a pandemic? Pandemics have occurred in known history, so isn’t it reasonable that another pandemic might occur? We are all aware that floods, fires, hurricanes, pandemics, strikes, etc. can occur; the issue of timeliness goes to whether we knew it might occur in relation to the contract as we agree to the terms.
On December 31, 2020 Chinese authorities alerted the World Health Organization of the apparent coronavirus epidemic. As of this date, it can be argued that the current pandemic was reasonably foreseeable. Was your agreement signed after this date? Did you or the other party have knowledge of the news reports starting to come out of China? How was anyone supposed to know that this was going to become the major event that it is?
Of course, the facts underlying each situation are always relevant, so it is best to have your general counsel or business attorney review them in relation to the force majeure provision to wording to determine its reach.
Distinction #2 What Legal Standard is Set Forth in the Force Majeure Clause?
In Part 1, we briefly discussed that causation between the coronavirus and a party’s inability to perform its contractual obligations is required to invoke force majeure. However, the legal standard used to define the causation in force majeure provisioning is also be a critical factor. The force majeure clause may require that performance be “impossible,” or it could invoke a lesser standard such as requiring performance simply be “impeded,” “impracticable,” or “hindered.” Thus, depending on the specific language used in the force majeure clause, a party may not be able to invoke force majeure simply because the ability to perform has become more difficult or expensive. For example, if the party can still fulfil its obligations in an alternate manner or by paying additional sums (such as by obtaining materials or labor from another source, or increasing overtime work for employees), it may not be allowed the release of its obligations. In the alternative, if the relevant standard is less strict, then the party may be able to find relief as the cost or difficulty to perform its part of the agreement increases.
Distinction #3 Variations on Force Majeure Clauses.
Although force majeure language can appear in a myriad of combinations, it is helpful to compare commonly used clauses. Six (6) partial examples are listed herein; exemplifying defintions of force majeure events, different legal standards, and alternative mitigation requirements.
Obligations Excused if No Reasonable Control: If either Party can provide evidence to the satisfaction of the other that its performance of any of its obligations under this Agreement is prevented by reason of any event or combination of events beyond its reasonable control, it shall be entitled to relief…
Notice Only Required: Upon occurrence of a Force Majeure Event, the non-performing party shall promptly notify the other party that a Force Majeure Event has occurred, its anticipated effect on performance, including its expected duration.
Simple: No party will be liable for nonperformance of any of its obligations under the agreement if its nonperformance was due to a Force Majeure Event as defined below…
Minimizing Damages: Neither Party shall be entitled to claim relief in respect of any period during which it could have complied with any obligation by using its best endeavors to avoid, overcome or minimize wholly or partly the effects of the said event or combination of events….The non-performing party shall use reasonable diligence to minimize damages and to resume performance.
With Definition: No party will be liable for nonperformance of any of its obligations under the agreement if its nonperformance was due to a Force Majeure Event. A Force Majeure Event shall mean any act of God, such as but not limited to; war; riot; civil strife; act of terrorism, domestic or foreign; embargo; governmental rule, regulation or decree; flood, fire, hurricane, tornado, or other casualty; earthquake; strike, lockout, or other labor disturbance; the unavailability of labor or materials to the extent beyond the control of the party affected; or any other events or circumstances not within the reasonable control of the party affected, whether similar or dissimilar to any of the foregoing.
Except for Payment: Neither Party shall liable hereunder for any failure or delay in the performance of its obligations under this Agreement, except for the payment of money, if such failure or delay is on account of causes beyond its control, including labor disputes, civil commotion, war, fires, floods, inclement weather, governmental regulations or controls, casualty, government authority, strikes, or acts of God, in which event the non-performing party shall be excused from its obligations for the period of the delay and for a reasonable time thereafter.
Compare the above examples with the force majeure wording in your agreement, and bring any nuances to the attention of your CEO and general counsel before making a decision on whether invoking a force majeure clause is in your best interest.
This is Part 2 of a 3-Part Series. Part 1, describing the steps to determine whether your agreements contain applicable force majeure language, is available here: Part 1: The 4 Steps to Force Majeure. Part 3 looks closely at the decision making process as a company decides whether to invoke a force majeure clause. If you need assistance determining whether to invoke a force majeure clause, please call or text 484-801-0021 or reach out to Cassandra Ortner at email@example.com. We proudly support the nation’s business owners.
*Janelle Peyton is the CEO and Managing Partner of Peyton Law, a leading boutique law firm designed to provide the highest quality branding, business, and legal services to companies via quarterly subscription called Strategic Legal Solution. Peyton Law offers brand building strategies through corporate and intellectual property law, including business entity formation, buy+sell, contracts, joint ventures, trademarks, patents, licensing, and other growth-related transactions.