What is a Force Majeure clause?
Force Majeure clauses have become a hot topic among legal circles and within the business and real estate worlds. With so many companies and individuals finding themselves in difficult and unique times many are looking for ways to terminate their legal contractual obligations. often times, contracts include “Force Majeure” clause. Such clauses are often drafted to assist the parties when unforeseeable circumstances arise that prevent a party from fulfilling its obligations under a contract. The COVID-19 pandemic and current civil unrest make it necessary for all businesses to consider the implications of the Force Majeure terms of its contracts.
A Force Majeure provision in a contract is intended to excuse a party’s performance if specified circumstances beyond the party’s control arise making performance impracticable, illegal, or impossible. Force Majeure provisions typically have three elements: (1) a list of types of events that are deemed to be triggering events, (2) a statement identifying the party bearing the risk of such a triggering event, and (3) a set of statements identifying the effect of such a triggering event on the obligations of the parties to the contract.
Triggering events typically fall into two groups. The first group comprises acts of nature such as earthquakes, floods, fire, famine, plague, and “Acts of God.” The second group comprises political and governmental acts. These include terrorism, riots, war, strikes, change of law or regulation, and orders issued by the government. The COVID-19 pandemic could arguable fall within the first group, and the orders being issued by the federal government, and state and local governments across the country, fall into the second group.
It is important to review the Force Majeure provisions of a specific contract to see exactly what triggering events are listed. It can be argued that if there is NO language contemplating a pandemic or health crisis as a triggering event, the COVID-19 pandemic may not be recognized as an event to terminate a contract.
More importantly, It is not enough, that the event be identified as a triggering event in the contract’s Force Majeure provisions. The event must also be a direct cause of a party’s inability to perform its contractual obligations. If the party’s performance is not unduly hampered by an event, performance is typically not excused. For example, several states have ordered non-essential businesses to cease operations. If a company is not operating in one of these states or is deemed to be an essential business, the issuance of the order may not excuse performance.
One must also read the Force Majeure provisions to see what affect the event has on the performance requirements of the parties. Sometimes the effect is to delay performance until the time the circumstances return to normal. Other times, the effect is to excuse performance altogether. In still other cases, the Force Majeure clause may specify that the contract is terminated (or may be terminated at the option of a party) should a Force Majeure event occur and affect operations for an extended period specified in the contract.