Contracts are essential in the business world because they delineate our business relationships. This implies that contractual provisions must state the party's liabilities during the performance of the contract.
We live in a world where unforeseen events may make some contract clauses' performance impossible, impracticable or highly damaging. These specific events are defined in the legal field as force majeure.
We have prepared all the information you need about force majeure: what it is, what type of events can be considered force majeure, and why this is a critical concept for any business.
What Is Force Majeure?
Force majeure is an exception to the chief principle of any contract, "pacta sunt servanda", derived from international law and embraced by the common law system, meaning "contracts are to be kept". This exception is a provision included in contracts to remove liability for failure to perform in specific circumstances.
In some cases, the parties cannot fulfill their obligations for reasons that are not under their control, such as unforeseeable and unavoidable catastrophes.
Therefore, this clause, also known as excused performance, is a triggering condition in cases whereby events are beyond the party's reasonable control. Its purpose is to prevent the parties involved in a contract from fulfilling their obligations under specific circumstances created by force majeure events.
The force majeure clause grants a party temporary reprieve from performing its obligations as long as the circumstances caused by the event remain. Furthermore, it grants the possibility for a contract to be terminated in case of consequential liabilities or a prolonged duration of a hindering event.
It is advisable to describe what type of events will be considered as force majeure for the agreement, but those events should be described generally because no one can think of all future types of catastrophes. If the agreement does provide a list of force majeure events, the parties could risk being held to that list which may not include some future event. For example, this happened to many people during the COVID-19 pandemic, because of the absence of the word "pandemic" on the force majeure clause of their agreements.
It is important to keep in mind that courts review carefully the language chosen in this type of clause because in many jurisdictions, courts will construe a force majeure clause narrowly, without giving them expansive meaning.
In New York, for example, only if the clause specifically includes the event that prevents a party's performance will that party be excused. If the clause contains a broader catchall phrase in addition to specified events, only the same type of events as those listed in the contract are covered.
For this reason, there are important language differentiations when drafting a force majeure provision in an agreement. For example, words such as "impossible" and "unreasonable" can completely change the scope and interpretation of the clause:
- If the contract states that the performance must be "impossible" in order to trigger the force majeure provision, and the parties can complete their contractual obligations even though it may not be under the most regular circumstances, they would still be obligated by the contract to do so.
- On the other hand, if the terminology used is "unreasonable", it is much more likely that contractual performance would be excused under the force majeure clause because this word allows a broader interpretation.
It is common to find the phrase "impossible to perform" in force majeure provisions. However, it can represent a high threshold to reach because many changes in circumstances will make a performance unadvisable for some of the parties. However, it could still be possible for others.
On account of this, we recommend using the words "unreasonable", "inadvisable", "commercially impracticable", or "illegal" to refer to the excusing performance.
We mentioned "epidemic" and "pandemic" above, but before the coronavirus hit the world in 2019, it was not as common as it is today to see these words enounced as force majeure events in agreements. In fact, contract drafters rarely included them because they weren't considered plausible threats.
Therefore, contracts that didn't include those events in their force majeure provisions and ended up non-performing their contractual obligations in due time and form had to wait for judges to consider the COVID-19 pandemic as a force majeure event according to their specific clause. Courts were carefully interpreting the strict meaning of the clauses' words in their decision-making process, and there were cases that were not considered as included in such clauses.
What Events Can Be Considered "Force Majeure"?
Force majeure is French for "greater force", and it commonly relates to events that occurred by an "act of God", for which neither party can be held accountable. By "act of God" we refer to any event beyond human control.
The concept of force majeure has many versions, and there are arguments for considering certain events as force majeure events, especially when it comes to occurrences that are not caused by nature but are out of the control of the parties. Therefore, a broader definition such as "an event or effect that can be neither anticipated nor controlled" is preferable.
In addition, this term is generally reserved for the following situations:
- Natural disasters such as hurricanes, tornadoes, and earthquakes
- War or armed conflict
- Terrorist attacks
- Acts of governments
- Epidemic or pandemic.
Clearly, we are talking about extraordinary events, but such events will always be analyzed, taking into account formal criteria to define if, according to the terms of the contract and laws, we are talking about a regular non-performance of the parties or one that excludes liability for being a force majeure event.
In this regard, the majority doctrine and the criteria stated by most US jurisdictions stipulate that a force majeure event must be:
- An unforeseeable event: an occurrence that is atypical for a normal course of life and can't be reasonably anticipated or expected.
- An external event: the parties of the contract must not have any influence on the event.
- An irresistible event: impossible to avoid.
When drafting one of these clauses, you should consider these details in order to avoid future problems and economic losses for you, your client, or your company. Unless it is expressly stated in the language of the clause, an irresistible, external, and unforeseen event will not be enough to excuse the performance of the agreement.
Why Are Force Majeure Clauses So Important for Any Business?
This type of provision can typically be found in contracts involving performance over a period of time, even more when it is a long period of time—such as supply contracts, real estate agreements, etc. Nevertheless, it is advisable to have a force majeure provision in any commercial contract.
As it has been made clear above, these clauses work to relieve businesses from performing obligations that are impossible or unadvisable to pursue during certain events, preventing the loss of capital and resources.
You may have heard about frustration of the contract or the "doctrine of frustration". It is important to know that these concepts are not the same, but they are directly related. A party can invoke frustration without a force majeure clause, but if this clause exists, it would displace the doctrine of frustration for any event that falls within the scope of that agreement's provision.
The doctrine of frustration has a broader scope, in which impracticability, frustration of purpose, superior force, and party's reasonable control are aspects that will be considered when this excuse is brought up in a court.
More specifically, a contract may be frustrated when, due to a supervening event, its performance becomes substantially different from the original obligations assumed by the parties at the time they assumed their contractual obligations. Also, this supervening event must substantially change the nature of the contractual rights and obligations that the parties could reasonably have contemplated before performance execution.
Thereupon, the supervening event must comply with the following requirements:
- It must occur after the formation of the contract.
- The contract makes no provision related to it.
- Has to be an external event of either party, not self-induced, and not foreseeable.
It is useful to know about the doctrine of frustration, but it is still advisable to try to draft an effective force majeure clause in your contract for greater legal certainty. Accordingly, the following aspects should always be included in this type of clause:
- Enumerating events that will be considered force majeure
- Actions to be performed prior to the activation of the force majeure clause
- Explaining the consequences of the occurrence of a force majeure event
- Delineating mitigation or remediation efforts.