Nearly seven months into the coronavirus pandemic, businesses throughout the world are still grappling with how to realistically perform their contractual obligations. In this article, we will discuss force majeure clauses, steps that you can take to protect you or your business regarding existing contracts and what to consider when entering into a new contract.
Force Majeure Clause
What exactly is a force majeure clause?
A force majeure clause is a contractual provision which excuses one or both parties’ performance obligations when circumstances arise which are beyond the parties’ control and make performance of the contract impractical or impossible. It is important to remember that invoking ones rights under a force majeure provision is one of several methods that should be considered as defenses for lack of performance or as a basis to void a contract ab initio (which means that the contract is invalid from the start). Other doctrines to consider include frustration of purpose or impracticability of performance.
What should be included in a force majeure clause?
First, be sure to include specific events beyond the parties control, such as severe weather events or acts of nature (e.g., floods, landslides, earthquakes or fire), as well as epidemics, pandemics, acts of terrorism, riots, explosions, strikes or other labor unrest. Second, there should be language addressing each party’s obligations and rights during the force majeure event. Finally, the contract should spell out the time period of the force majeure event and its effect on the parties (i.e., what obligation(s) are the parties excused from performing). For example, in real estate, a force majeure provision typically will not apply to an obligation to pay amounts due under the contract such as rent or an obligation to pay debt service.
How is a force majeure clause interpreted?
Force majeure provisions are typically strictly construed, which means that the specific language will need to be analyzed to determine if the facts and events will give rise to relief from the applicable obligation. While the parameters and interpretation of the clause will be determined by the law that governs the contract, in order for the provision to give rise to a claim of force majeure, the claim must typically satisfy the following:
- the event must be beyond the reasonable control of the applicable party;
- the applicable party must have been prevented from performing its obligation;
- the applicable party must have taken all reasonable steps to avoid its non-performance and have satisfied its duty to mitigate damages as a result thereof; and
- applicable and timely notice must have been given to the counterparty in accordance (and usually in strict accordance, time being of the essence) with the relevant agreement.
What Steps Can You Take Regarding Existing Contracts?
For commercial agreements, if you are a service provider, consider whether your inability to provide services is due to a force majeure event, whether performance can be excused under the contract’s governing law and what obligations and rights you may have as a result. If you are a purchaser, consider whether you have the right to terminate the agreement, receive a refund of amounts paid and/or procure substitute services and the time period to enforce these rights. For real estate leases, tenants can seek to negotiate abatement of rent with either an extension of the lease term or payment of the unpaid amount over the remaining term of the lease. For real estate purchase agreements, purchasers who are not able to inspect the premises may wish to negotiate an extension to any deadlines.
In Light of Covid-19, What Steps Should You Take if Entering into a New Contract?
We recommend including “pandemic,” “epidemic,” “act of Governmental Authority” and/or “state of emergency” as a force majeure event. Using all of these specific examples should help cover the current public health crisis and resulting governmental orders (e.g., “stay at home” mandates). Additionally, consider additional elements that may need to be met under the parties’ particular choice of law governing the contract. In commercial leases, it may be wise to provide for the abatement of payments due under the lease in the event the tenant is unable to operate its business or access the premises. In purchase agreements, consider allowing for extension of due diligence deadlines in the event physical inspections cannot be conducted as a result of a force majeure event.