4 Best Practices for Force Majeure Clauses in Commercial Contracts

What is a Force Majeure Provision?

The term force majeure literally translates from French to English as “superior force”  and is commonly referred to as an “act of God”. According to Black’s Law Dictionary, the provision “is meant to protect the parties in the event that a contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care.”

This provision is typically included toward the end of a contract and has, at times and by various parties, been viewed as “boilerplate” – or “cookie cutter”, in layman’s terms – language. However, as some companies were reminded during COVID-19 when government shutdowns impacted their commercial contracts, each of these clauses should be carefully considered and potentially tailored to that transaction’s risks. In other words, the provision should oftentimes be unique to that specific contract. Let’s take a look at four considerations to help level up your contracts to better protect your business related to these events. 

4 Best Practices for Force Majeure Provisions

1. Define the force majeure event.

Since force majeure has no generally accepted or implied definition, contracts do not offer implied protection. Therefore, most contracts should explicitly define a force majeure event for its purposes, often listing specific event types (e.g., fire, flood, act of war, strike, etc.). Further, courts tend to narrowly interpret these provisions, so a catch-all phrase referencing unspecified events generally beyond the reasonable control of the parties (e.g., “any other event outside of the parties’ reasonable control”) is generally appended to the list. For all parties entering the contract, it’s important to understand the definition of “beyond reasonable control,” which requires both that the event was not objectively foreseeable to any party and that it wasn’t caused by negligence and/or avoidable.

Additionally, the party invoking the provision is typically held to a duty to mitigate the cause of non-performance while partially fulfilling obligations if able—and resuming performance of those obligations when the cause is removed. For example, if the unforeseeable event is a flood that damages 75% of a supplier’s fulfillment of an order, that supplier is typically expected to fulfill the remaining 25% of the order while invoking the force majeure provision for 75%.

 


Supplemental Brief Icon 2 | Massey, Stotser & Nichols, PC

Recent Litigation Invoking Force Majeure Clauses

COVID-19 IMPACT

Pre-pandemic litigation regarding force majeure provisions often included determination of the cited event’s foreseeability with the courts scrutinizing the entire contract’s language for indications that specific risk was foreseeable.

However, the COVID-19 shutdown as a force majeure event has proved an exception to-date, likely due to its wide-reaching impacts compared to the typically narrow scope of a force majeure event (e.g., a building fire impacting one party). Thus far, litigation arising from parties invoking these provisions as a result of the COVID-19 pandemic has generally seen parties accepting the pandemic’s shutdown as a force majeure event, with litigation focused instead on the scope of relief, as detailed in #3 below.

As “normal” business resumes and force majeure provisions generally return to invoking events with more narrow scopes, scrutiny of the determination of foreseeability will likely also return.


 

2. Prescribe the causal relationship between the force majeure event and the performance breach.

The non-performing party must be able to demonstrate proximate causation–meaning, it’s a substantial factor but not necessarily the sole factor–between the force majeure event and its breach of performance.

Restrictive language can increase the difficulty of demonstrating this link. For example, contracts excusing performance only when it is “impossible” due to the event are requiring a high threshold. Language more broadly providing for performance that is “inadvisable, unreasonable, commercially impracticable, illegal, or impossible” allows additional flexibility in its interpretation. Similarly, only allowing for the “prevention” of performance by the force majeure event is a higher threshold than “impediment or prevention”.

A potential additional consideration is whether the contract should limit the event’s impact based on distance or time. For example, contracts may require the event to occur within a set number of miles of an agreed upon location (e.g., an event space is within a set radius of an earthquake event, etc.) or that the clause must be invoked within a set number of days of the event’s occurrence.

In a December 2020 case, JN Contemporary Art LLC v. Phillips Auctioneers LLC, a painting owner was guaranteed a $5 million minimum sales price during a May 2020 auction. The auction house – first postponed the auction due to COVID-19. After two months, it invoked the force majeure provision to terminate the contract, which read: “In such [termination] event, our obligation to make payment of the Guaranteed Minimum shall be null and void and we shall have no other liability to you.” The painting owner sued, arguing the painting should be sold in one of the auction house’s online auctions, but the auction house won a motion to dismiss due to the force majeure provision’s clear protection of the auction house.

3. Specify the available scope of relief.

Various remedies available under force majeure provisions may be included within a single contract, as it may provide for:

    • delay of performance,
    • suspension of performance during the force majeure event,
    • termination of the contract if performance is unable to be completed within a specified time limit, and/or
    • immediate termination of the contract.

It’s also beneficial to consider any payments (e.g., deposits and expense reimbursements) that could be impacted upon invoking this clause and ensure they are addressed specifically within the contract. Cancelled event contracts have seen a source of recent litigation citing the COVID-19 lockdown as a force majeure event. Litigants have generally agreed that governmental lockdowns triggered the related clauses, terminating the contract. However, related issues, such as whether deposits should be refunded, became sources of contention. When contracts included language prescribing previously paid deposits, court rulings typically aligned with the contract. Without contracts specifying how to handle deposits, decisions were open to court interpretation, often requiring a more comprehensive review of the force majeure provision and/or contract.

4. Define the timing and process for any required notifications.

Generally, force majeure provisions contain a notification provision, requiring the non-performing party to notify the other party that they are invoking the provision. Prescribing this process, including acceptable methods for delivering the notification and its required timing, can help all parties plan and mitigate risks. For example, notification timing can encompass notifying the other party:

    • Within a set number of days upon becoming aware of a potential force majeure event, and/or
    • Within a set number of days of the force majeure event’s occurrence when invoking the related provision.

An additional note: a party’s failure to comply with any notification requirements can potentially jeopardize protection under the force majeure clause. 

Next Steps

To ensure your contracts are the unique “snowflake” type to best protect your business, contact our MSN attorneys for a consultation regarding the force majeure clause considerations most appropriate for you.

RELATED ARTICLES

1780 GADSDEN HWY
BIRMINGHAM, AL 35235

© 2022 Massey, Stotser & Nichols, PC   |   All Rights Reserved   |   Site Map

No representation is made that the quality of the legal services to be performed is greater than the quality of legal services performed by other lawyers.

error: Content is protected !!