Force Majeure/Acts of God
Often buried in the boilerplate language of construction contracts is a provision known as a "force majeure" clause, which could provide relief to contractors facing unusual or extreme circumstances. Due to the COVID-19 pandemic and worldwide supply chain constraints, the importance of understanding this provision has never been more urgent.
What Constitutes Force Majeure?
The French term force majeure translates literally to “superior strength.” The concept is generally defined as an “event or effect that can neither be anticipated nor controlled” that “prevents someone from doing something that he or she had agreed or officially planned to do.” Many contracts contain force majeure clauses excusing performance under such unanticipated circumstances.
The term force majeure is often conflated with the phrase “act of God.” They have different meanings and scope. An “act of God” is generally considered an unexpected and uncontrollable natural disaster that impedes performance. Force majeure clauses in contracts typically excuse performance under such circumstances. Usually, though, they go further by including a comprehensive “parade of horribles,” natural and unnatural, that excuse performance, such as hurricanes, tornados, floods, explosions, terrorism, war, blockade, embargo, strikes, lockouts, nuclear emergency and on and on and on. Parties to a contract can include any specific scenario they choose.
If the event is not specifically listed, that is not the end of the analysis. The inability to foresee the occurrence of a force majeure event is a fundamental rationale for the clause. It is understandable, then, that parties often fail to explicitly list all events that constitute an excuse for performance. Often, our most important failure is one of imagination. For that reason, most force majeure clauses contain “catchall” provisions excusing performance in the event of “any other emergency beyond the parties’ control, making it inadvisable, illegal, or impossible to perform their obligations under this Agreement.” Courts interpret these provisions narrowly, and for guidance will compare the claimed event to those specifically itemized in the clause. Most courts have held that economic hardship alone does not qualify.
Invoking the Provision.
Most force majeure clauses contain strict notice provisions. A party must follow such provisions to the letter. Even in the absence of specific notice requirements, a party should provide immediate notice of the impediment and provide continuous updates. The purpose of the requirement is to allow the other party to make alternative arrangements and mitigate the impact of the non-performance. Delayed notice, especially if provided for the first time after the deadline to perform has expired, may result in waiver.
Additionally, a party must attempt to overcome the impediment. If there are alternative avenues of performance, those must be explored, even if the cost is increased. A party seeking to be excused should demonstrate prudence, due diligence, and the exercise of care. Difficulty is not the same as impossibility.
Common Law Relief: Impossibility, Impracticability, and Frustration of Purpose.
Even in the absence of a force majeure clause, relief may be found in common law defenses such as impossibility, impracticability, and frustration of purpose. Where performance becomes impossible through no fault of the contracting party, performance may be excused. Impracticability may be a defense where, though possible, performance has become unreasonably and excessively expensive due to an unforeseeable supervening event, the nonoccurrence of which was a basic assumption of the contract. Finally, the doctrine of frustration of purpose may excuse a party in certain situations where the objectives of the contract have been utterly defeated by circumstances arising after the formation of the agreement.
Include a force majeure provision in your contract. Do not rely on the common law defenses, which are vague and subject to interpretation. Specifying the exact circumstances that excuse performance will allow parties to make confident decisions during times of uncertainty.
Include a comprehensive “parade of horribles.” Parties can contractually agree to excuse performance under any specific circumstance. This can include foreseeable events (such as market collapse, price swings, or recession) if specifically included. Now, more than ever, our imagination should be expansive. Every force majeure provision includes the standard events such as major natural disasters, wars, and strikes. Businesses should use this opportunity to include more creative scenarios tailored to their needs.
Remove the phrase “act of God.” This vague phrase not only creates uncertainty, which breeds litigation, it opens a can of worms. Imagine a jury, six different people with six different religious and political backgrounds, trying to determine if a business’s inability to perform during the pandemic was caused by an “act of God” as opposed to local regulations, Donald Trump, or the Chinese government.
Force majeure clauses and the common law defenses of impossibility, impracticability, and frustration of purpose may provide companies needed relief in this difficult economic environment. Now is the time to review these clauses and doctrines to determine how they might affect current contracts and plan for the future.
You can find a comprehensive article exploring these forms of relief in the context of the COVID-19 pandemic here.