Hurricane Sandy is causing extensive disruptions and losses in the northeastern United States, which will ripple through other parts of the country. As part of any evaluation or response to damage or interruption claims, you should review any critical contracts that are likely to be impacted. As part of your analysis, you might consider the following questions:
- Is there a force majeure clause? If so, the terms of the clause are critical, and should be studied. If there is no such clause, then common law excuses may still apply (including common law force majeure and the doctrine of impossibility of performance).
- What state’s law applies to the contract? States such as Texas, Delaware, and New York differ in how they construe force majeure clauses. Some states apply the law exactly as the contract is written; other states consider the common law concepts of force majeure, regardless of whether they are expressly written into the terms of a contract. If the contract involves a purchase or sale of goods, the UCC provisions may also be applicable.
- If your contract lists examples of force majeure events, does the list clearly include storms and other weather events? States differ on whether and what type of storms constitute force majeure. A hurricane in the Gulf of Mexico may be viewed differently than one which hits New Jersey. Also, if you are relying on a “catch-all” clause, you should consider that such clauses are construed differently, depending on how they are written.
- Is the storm preventing performance, or is there some other cause? In order to claim force majeure, the force majeure event must prevent performance and be beyond the control of the party claiming the defense.
- When does written notice of a force majeure event need to be given (and what should the notice say)? Some jurisdictions strictly require that a force majeure notice be given timely in accordance with contractual requirements. Failure to timely provide written notice could prejudice assertion of the defense.
- Does the storm truly prevent performance? Hurricane Sandy may be force majeure for some parties, and not for others. An event like Hurricane Sandy may actually prevent some parties from being able to perform their agreements, while other parties may be able to perform, but not at the same price or cost. If, for instance, the force majeure event simply increases the burdens of performance for a party without making performance impossible, then it is likely that the party will not be able to claim force majeure.
- What if force majeure doesn’t apply? If performance is not impossible, but economically devastating because of a change in prices or costs, then consider whether the contract provides for “price majeure” or similar economic “outs.” Or, alternatively, the contract might contain a provision for liquidated damages that are less costly than the cost of performance. You may also need to consider the relationship between a claim of force majeure and one for liquidated damages, and whether, under your contract, a force majeure event excuses a party from paying such damages. If force majeure doesn’t apply and if the contract does not provide for liquidated damages, then you may need to consider other damage issues such as whether lost profits or other consequential damages are effectively disclaimed.
- When does force majeure end? Generally, a claim of force majeure may continue for only so long as the force majeure event remains in effect and prevents performance. Thus, a party claiming force majeure may have a duty to promptly notify the other side when that event no longer prevents performance, and many contracts place an affirmative duty on the party claiming force majeure to take good-faith measures to overcome any force majeure event.