Brown Moskowitz & Kallen – Understanding Force Majeure Clauses in Business Contracts
By Stuart M. Brown, Partner and Norman D. Kallen, Partner
Brown Moskowitz & Kallen, P.C.
How should a business respond when it or its counterparty cannot fulfill obligations under an existing agreement or when entering into a new business relationship? There are myriad practical and legal answers to the question. Here, the focus is the application of the concept of force majeure in the context of contractual business relationships.
The term “force majeure” literally means “superior force.” It is a common clause in contracts that can be used to release or excuse a party to the contract from performance when an extraordinary event or occurrence beyond the control of the parties prevents one or more of the parties from fulfilling its obligations under the agreement. In certain circumstances, rather than completely relieving a party of its responsibilities, the contractual requirement may be suspended during the force majeure event.
Some courts apply a standard of foreseeability to determine whether an event constitutes a force majeure. In brief, as with most legal issues, the answers to the questions “What constitutes a force majeure event?” and “What is the expected result of successfully proving that an occurrence is in fact a force majeure?” are not clear. There is no bright line. Any position or conclusion is subject to interpretation and challenge.
Practically, a business owner with an existing contract must look at the agreement to determine whether there is a force majeure provision, how force majeure is defined in the provision, whether there are contractual requirements to taking the position that performance is frustrated by a force majeure event and what relief is available under the circumstances. If a contract does not contain a force majeure provision, there may still be remedies for non-performance. However, they are subject to broader interpretation under the common law.
For parties entering into a new agreement, a force majeure provision should be included and carefully crafted to cover a broad scope of events and occurrences and a broad range of remedies. Of course, in this instance, each side may seek a different scope and range. Optimally, an existing or new agreement would contain a force majeure provision modified to reflect the new reality. While some argue that a less specific force majeure clause allows for broader application because not all force majeure events can be listed, the less subjective the provision, the more certain an outcome can be expected. A broad “catch- all” provision can serve the purpose of incorporating instances where a particular event is not included. However, as a risk allocation mechanism, the more specific the list, the stronger the argument in support of the application of the force majeure clause to the non-performance under a given agreement. Neither party can argue that a given event was not anticipated as grounds for granting relief for failure to perform.
When a contract does not include a force majeure event provision, the parties may still have remedies under the common law under a variety of legal principles. However, the hurdles to be surmounted in proving a common law case are more numerous and the process becomes more burdensome. A party will likely have to argue that a given event was not foreseeable, was beyond its control, was the proximate cause of the failure to perform and made performance impractical or, even, impossible. The inquiry and arguments become much more complex.
Of course, in addition to reliance on a force majeure provision to seek relief from a counter-party for non-performance, business owners should consider whether there is insurance coverage for losses sustained as a result of a breach based on a force majeure event. In today’s circumstances, all business owners should carefully review and analyze their business insurance policies to ascertain whether there is coverage for damages associated with a force majeure event. Many policies do not cover epidemics, for instance. However, there may be other grounds for coverage. For example, does the policy cover government actions or orders or national emergencies such as arose during the COVID-19 pandemic? Parties seeking new coverage should carefully compare carriers and policies to get the broadest coverage possible.
Following are four questions to ask when assessing a force majeure clause:
- What is covered; epidemics, pandemics, viruses; national or regional emergencies; government orders, etc…? Or, is there a broad “catch-all” provision?
- When are you required to notify the other party that you cannot perform?
- Why is performance impossible or impractical?
- How can damages be mitigated – is partial performance or delayed performance possible?
The COVID-19 pandemic taught us that the unforeseen occurs, sometimes on an unprecedented scale. Whether and how a force majeure clause, common law remedy or insurance coverage applies to any future event is unknown. The critical point is to prepare: review existing contracts; draft broad force majeure provisions in new agreements; analyze current insurance coverage and/or secure the broadest coverage in new policies.
This article was first published here.