Over the past two months, we have all added some new terminology to our collective vocabulary. A few short months ago, social distancing, asymptotic carriers, and gating criteria were terms virtually none of us had heard. Now these terms float into conversations about how we will live our lives and run our businesses for the foreseeable future.
As we all know, the Pandemic has significantly impacted the ability of individuals and businesses to carry out contracts with one another. As a result, another term will likely creep into more and more conversations, and will bear heavily on how we deal with business interruptions caused by the COVID-19 Pandemic. If you haven’t started already, it’s pretty likely that you will soon be hearing and talking about “force majeure.”
Force majeure will likely impact your life and your business, so just like the other new language, it’s important to learn and understand what it is, and how it will impact you.
What is force majeure?
The short answer is that force majeure is a provision in many contracts that allows performance of that contract to be canceled or postponed because performance has been rendered impossible.
Force majeure translates literally from French for “superior force,” as in a force strong enough to prevent a party from performing its obligations under a contract.
Generally, a force majeure event is, according to Black’s Law Dictionary, “an event or effect that can be neither anticipated, nor controlled.” A force majeure event must prevent, impede or hinder performance by the affected party, or by both parties, even where the affected party took all reasonable steps to avoid or mitigate the event or its consequences of the force majeure event. Most often, performance must actually be rendered impossible, even as opposed to very, very difficult.
The parties to a contract can, and usually do, agree as to what constitutes a force majeure event in the provisions of their contract and usually do in a force majeure clause.
A force majeure clause is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable as a result of a force majeure event and often defining or listing what will qualify as a force majeure event. Often it lists the types of events that will be considered force majeure events, the actions parties must take to invoke the clause, and what rights the parties have when they invoke the clause.
The critical question is whether the contract provision covers the situation in which we find ourselves. In some contracts, the force majeure clause includes pandemics, epidemics or health emergencies. Other contracts are less clear. The difficulty with unanticipated events is they are difficult to include in a list or definition, as they are, well, unanticipated.
How might force majeure provisions affect me?
Most of the risks and duties undertaken by the Parties to a contract are allocated based upon the Parties’ expectations, foresight and negotiation. Force majeure provisions reflect the Parties agreement as to what happens when the completely unexpected happens.
Enter coronavirus. The COVID-19 Pandemic is a public health crisis unlike anything most of us have seen in our lifetimes. It has resulted in city, state, and federal authorities taking actions to prevent the spread of the virus including issuing orders which prevent gatherings, travel, and even completely closing some businesses for a time.
As a result, some parties have had to delay performance of their contracts, and others have been unable to perform contracts they agreed upon before the pandemic. This obviously will result in financial losses under those contracts.
The force majeure clauses in those contracts will ultimately determine who bears those losses.
This raises important questions. Is the pandemic a force majeure event under your contract? What do you need to do to invoke the force majeure clause in your contract? What happens if I invoke the force majeure clause?
Unfortunately, it depends. Force majeure depends on your contract, and must be determined on a case by case basis.
What can I do?
First and foremost, read your contract. Does it include a force majeure clause? If it does, take a look at the definition of force majeure. Is that definition broad enough to possibly include your situation? Does the definition expressly include an event like a public health emergency, epidemic, or pandemic?
Does the force majeure clause require action on your part, like giving notice to the other party, to invoke the clause? Is there a deadline by which the clause must be invoked?
What rights do you have upon invoking the force majeure clause?
Second, if you or your business have incurred financial losses or expenses under contract, as a result of the Pandemic, keep track of those losses and expenses. Save documents reflecting those losses and expenses.
Third, talk to us. The language of these provisions, viewed in light of the past few months can seem confusing. They are designed to deal with the unforeseeable. Whether you can invoke force majeure can be a complicated question. We are happy to help.
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