Stay safe and shelter in place have taken on new meaning as the economic fallout from pandemic-induced isolation has left many businesses unable to perform contractual obligations.
Travel bans, supply chain interruptions, and shelter in place orders have business leaders scrambling to identify ways to shore up their cash positions and limit risk. At the same time, they are trying to ensure continuity of operations and service.
Force Majeure Definition
Force majeure has become the word du jour; French for superior force, it refers to a principle of contract law in which parties to a contract can limit their liability and performance obligations. In the simplest terms, it allows parties to suspend or discontinue the performance of contractual obligations in cases of emergent circumstances beyond the parties’ control. It may also operate to limit contractual liability.
But its practical application is nuanced. Here’s what you need to know.
Things You Need to Know About Force Majeure
1. Contracts must explicitly include Force Majeure provisions to invoke the exception.
In the U.S., force majeure provisions, in most cases, must be explicitly included in a contract to invoke this exception to contractual performance. When it comes to contractual interpretation, courts most often strictly adhere to the contractual language in defining the scope of the doctrine’s application.
As a result, each case will turn on the specific contract language regarding what is considered a triggering event, reasonable foreseeability, material impact, and what types of notice and documentation are required to invoke its use.
2. Act immediately to gather evidence and comply with notice requirements.
The party relying on force majeure must demonstrate that the unforeseen event rendered performance objectively impossible, not merely burdensome or expensive. Also, the triggering event must be beyond the parties’ reasonable control, and the invoking party must demonstrate diligence in attempting to carry out performance obligations.
Finally, some force majeure clauses may also impose specific notice requirements on the invoking party. This requires a prompt review of relevant contracts and immediate action if you are contemplating invoking its use.
3. Impossibility or impracticability of performance may be an alternative out if force majeure does not apply to your situation.
If your contract does not have a force majeure clause, the doctrines of impossibility and impracticability of performance may prove an alternative way to relieve contractual performance obligations and limit risk. They apply where parties assumed an event would not occur, and its occurrence has made performance impossible or impracticable.
Some courts interpret the doctrine strictly, requiring the invoking party to demonstrate actual impossibility. Many businesses have been ordered to close by the state or local government and therefore have a solid basis for an impossibility argument.
In contrast, others are more lenient in their interpretation, allowing for consideration of economic costs to performance under unexpected adverse conditions. Nevertheless, the burden of establishing entitlement to relief on this premise remains high.
Understandably, everyone would be happy for a looking glass to shed light on whether the current pandemic will excuse the failure to meet financial and other obligations. However, the current challenges imposed by the COVID-19 pandemic will no doubt cause courts and legislators alike to examine contractual doctrines, such as force majeure and impossibility or impracticability of performance, with fresh eyes.
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Many force majeure clauses do not specifically mention epidemics or pandemics; however, many do specify an “Act of God” as a basis for canceling contractual obligations. It is likely that this pandemic will lead to courts interpreting whether an Act of God includes a pandemic.
In the meantime, the application of force majeure and its sister doctrines of impossibility and impracticability are highly fact-specific, so everyone’s situation will be different.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.