Monday, March 23, 2020

Revisiting the Need for Force Majeure Clauses

By Bill Siegel

We are witnessing interesting times in these hectic days of the Coronavirus.  We survived the terrorist attack of 9-11, hurricanes, earthquakes and the Ebola virus and we will get through this as well.  Rarely do parties consider these unexpected events when negotiating contracts and yet, it is now more important than ever to anticipate these types of events moving forward. 


Generally speaking, a “force majeure" clause allows parties to avoid their contractual obligations when certain events or circumstances beyond their control arise whereby it is basically inadvisable, commercially impracticable, illegal, or impossible to perform.  Without a force majeure clause, unnecessary litigation may arise when one party requires the other to perform and demands damages.  It still allows a party to dispute whether performance is impractical or impossible, but the difference  is that it allows parties to rely on a contractual provision as opposed to the common-law contract doctrines of "impracticability" and "frustration of purpose," which often times may not excuse performance or liability.


Because the courts will strictly construe a contract, it is important for both parties to anticipate what events may be covered and the various risks involved when one party is excused from performance.  In other words, should it cover:  natural disasters often described as acts of God or war or terrorism, civil disorder, labor strikes, fires, disease or medical epidemics, and/or disruptions in transportation. 


To avoid courts picking apart what would and what would not constitute force majeure, one may consider the following broadly drafted clause:

An event of force majeure is an event or circumstance that is beyond the control and without the fault or negligence of the party affected and that by the exercise of reasonable diligence the party affected was unable to prevent, provided that event or circumstance is limited to the following:

(a) riot, war, invasion, act of foreign enemies, hostilities (whether war be declared or not) acts of terrorism, civil war, rebellion, revolution, insurrection of military or usurped power, requisition or compulsory acquisition by any governmental or competent authority;

(b) radiation or contamination, radio activity from any nuclear fuel or from any nuclear waste from the combustion of nuclear fuel, radioactive toxic explosive or other hazardous properties of any explosive assembly or nuclear component;

(c) pressure waves caused by aircraft or other aerial devices travelling at sonic or supersonic speeds;

(d) earthquakes, flood, fire or other physical natural disaster, but excluding weather conditions regardless of severity;

(e) strikes at national level or industrial disputes at a national level, or strike or industrial disputes by labor not employed by the affected party, its subcontractors or its suppliers and which affect an essential portion of the works but excluding any industrial dispute which is specific to the performance of the works or this contract; and
(f) epidemics, diseases, viruses or the like that constitute a public health risk to other States through the international or national spread of the epidemics, diseases, viruses or the like and potentially require a coordinated State, national or international response; and

(g) any other events, including emergencies or non-emergencies that may make it ill-advisable, impractical or impossible for one party to perform due to unexpected circumstances.


Be careful about the use of subsection (g) as this broad catch-all may give one party an excuse to avoid its contractual obligations.  Also, read the force majeure clause carefully as you may want some restrictive language.  For example, you may want to eliminate “non-emergencies” to narrow the scope. 


In addition, to prevent complete cancellation of the contract, the parties may want to consider instances in which under performance is a viable solution as opposed to complete cancellation. 


The parties may also want to consider adding operative language as part of the force majeure.  For instance, if a party is relieved of all obligations then the following clause should be inserted.


Neither party is responsible for any failure to perform its obligations under this contract, if it is prevented or delayed in performing those obligations by an event of force majeure.

Also, a notification of a force majeure event is recommended that would state something to the effect:

Where there is an event of force majeure, the party prevented from or delayed in performing its obligations under this contract must immediately notify the other party, giving full particulars of the event of force majeure and the reasons for the event of force majeure preventing that party from, or delaying that party in performing its obligations under this contract and that party must use its reasonable efforts to mitigate the effect of the event of force majeure upon its or their performance of the contract and to fulfill its or their obligations under the contract.

The parties may want to consider a requirement to perform once the event has been minimized:

Upon completion of the event of force majeure, the party affected must as soon as reasonably practicable recommence the performance of its obligations under this contract and provide a schedule to minimize the effects of the prevention or delay caused by the event of force majeure.

The parties may want to insert a provision that does not eliminate complete liability by inserting the following provision:

An event of force majeure does not relieve a party from liability for an obligation which arose before the occurrence of that event, nor does that event affect the obligation to pay money in a timely manner which matured prior to the occurrence of that event.

The parties may want to insert a provision eliminating an obligation to pay which would state:

There shall be no liability for: (a) any costs, losses, expenses, damages, or the payment of any part of the contract price during an event of force majeure; and (b) any delay costs in any way incurred by the contractor due to an event of force majeure.


In many agreements, the drafting of force majeure clauses has been more of an afterthought where a form clause is inserted into a comprehensive contract. In light of these current times and what may be more foreseeable, greater care and discussion should take place when drafting force majeure language so that it suits the needs and purposes of the contracting parties and all the potential foreseeable scenarios.
 

See our COVID-19 Quick Reference page for additional articles.

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