As a business owner or executive, reading through the legalese of your key contracts might not be high on your list of priorities when you’re figuring out how to survive a global pandemic. I have news for you – buried among dozens of pages of ten-dollars words might be a contract terms of great importance: the force majeure clause.
What is a force majeure clause?
A force majeure clause in a contract relieves a party from liability for unavoidable catastrophes that interrupt the expected course of business. In other words, if an event that fits the definition in your force majeure clause occurs, one or both parties may not be required to fulfill their contractual obligations.
Why do contracts have force majeure clauses?
One aspect of contract negotiation is determining which party will bear certain risks. Like many other popular contract terms, force majeure clauses are risk allocation tools. They dictate how and when a party will be excused from liability if they are unable to perform their contract obligations due to a force majeure event.
What are force majeure events?
Contracts vary on what events trigger the force majeure clause. Even the way contract defines a force majeure event can differ greatly from one to the next, but the most common and straightforward approach is to make a list. A typical force majeure provision might read something like this:
A force majeure event means war, flood, lightning, drought, earthquake, fire, volcanic eruption, landslide, hurricane, cyclone, typhoon, tornado, explosion, civil disturbance, act of God or the public enemy, terrorist act, military action, epidemic, famine or plague, shipwreck, action of a court or public authority, or strike.
Sometimes the definition of a force majeure event is limited to the events on the list. On the other hand, the events on the list may just be provided as examples. In any case, a force majeure event is usually one that (a) prevents a party from performing its obligations under the agreement, (b) is beyond the control and not the fault of the nonperforming party, and (c) the nonperforming party has been unable to overcome through the exercise of due diligence.
How does a force majeure clause help me deal with Coronavirus (COVID-19)?
If you are concerned that your business might not be able to meet certain contractual obligations due to consequences from Coronavirus (COVID-19), read your contract’s force majeure clause and ask yourself three questions: (1) Does this contract’s force majeure clause cover a global pandemic like Coronavirus (COVID-19)? (2) Is Coronavirus (COVID-19) preventing me (directly or indirectly) from performing my obligations under this contract? (3) What happens if I invoke the force majeure clause?
The third question is the most important. For example, are you excused from performing your obligations completely, or is your performance merely delayed? Who bears the costs of your nonperformance? Are you or the other party able to cancel the contract as a result of a force majeure event?
Final thoughts and tips based on examples we’ve already seen:
If you’re seeking to invoke a force majeure clause, consult an attorney and describe your unique situation. If you haven’t thought of these already, here are some questions you may consider asking based on some of the issues we’re dealing with on behalf of our law firm’s clients:
- How does an epidemic differ from a pandemic? What happens if my force majeure clause mentions one but not the other?
- My country/state/county/city has declared a state of emergency; does that automatically trigger my force majeure clause?
- My contract doesn’t have a force majeure clause; can I still avoid performing my contractual obligations due to Coronavirus (COVID-19)?
- My company is scheduled to host a huge event and we have contracts in place with hotels, sponsors, attendees, vendors, etc. – what can I do?
- What state’s law covers my contract? Does that matter in this situation?
As of the date of this article, force majeure clauses are already being invoked under contracts around the world. Currently the effects seem to be hitting certain industries the hardest, such as construction, manufacturing, mining, shipping, tourism, and oil & gas. We’re tracking the latest legal developments pertaining to Coronavirus (COVID-19) and would welcome the opportunity to help your business navigate these unpredictable times. For assistance with these issues or any others facing your business, please contact our law firm at info@clark.law or 704-837-0055.
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