Force majeure is a term used in contracts to describe unforeseen events, outside a party’s control, which may exempt a party from liability. With the recent outbreak of COVID-19, businesses may experience supply chain disruptions or interruptions that impact their ability to perform under a contract.
An Overview of Force Majeure Clauses
It is widely understood that when parties enter into a contract, that they do so in good faith, with the expectation that both parties will perform the contract to the best of their abilities. However, on occasion, there are instances where one party may not be able to perform their contractual obligations due to forces outside of their control.
When such circumstances arise businesses may look to force majeure clauses in their contracts for relief from performance. Further, if a contract does not have a force majeure clause, the uniform commercial code may apply to provide relief under the doctrine of commercial impracticability (UCC sec. 2-615 and state law adaptations). A party may be excused from performing its obligations due to the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made.
Force Majeure Clause Limitations
Force majeure is not intended to excuse negligence, misconduct, or any other impropriety of a party, or situations where the intervening circumstances are specifically contemplated by the parties or already accounted for in the parties’ agreement. Commercial difficulty alone, including financial constraints, do not constitute a force majeure event.
Similarly, as to commercial impracticability, increases in costs alone may not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. In the case of fixed price contracts, a collapse in the market in itself may not be a justification, as the UCC comments consider that to be the type of business risk which business contracts made at fixed prices are intended to cover.
Often times (but not always) force majeure clauses contain an exhaustive list of possible events, such as ‘acts of God, acts of war, riots, rebellion, explosions, avalanche, flooding, impossibility of obtaining raw materials, delays by third parties, or other natural calamities.’ While this may make the contract more interesting to read, it is not always necessary to itemize circumstances which are clearly beyond reasonable control. However, businesses should not assume that a particular incident, such as COVID-19 constitutes a force majeure event.
At any given moment a business may be faced with numerous problems, some of which may be outside their control, however each of those problems cannot be taken as grounds for not performing a contract. Before invoking its rights under a force majeure clause, businesses must carefully evaluate whether their circumstances constitute a force majeure event.
Therefore, it is important for individuals and businesses to consult with an experienced attorney before invoking their rights under a force majeure clause or seeking an excused performance or delay under the doctrine of commercial impracticability.
Force Majeure Clause Requirements
When a force majeure event does occur, agreements may require adherence to specific policies and procedures outlined in the agreement. These may include taking reasonable action to mitigate damages as well as careful documentation of the force majeure event itself. Written notice of the force majeure event is often required, but some contracts may require that a party provide written notice of a force majeure event even before it occurs (provided it is reasonably foreseen). There are often continuing requirements to provide information updates periodically. Further, many clauses allow the other party to seek alternate sources of supply during the force majeure event.
It is common for courts to evaluate a force majeure provision in accordance with the plain meaning of its terms, as they are contained within the contract as a whole. Therefore, reliance on a force majeure clause requires a detailed examination of all the language contained in the contract.
Whether, and to what degree COVID-19 constitutes a force majeure event requires a detailed examination of the specific facts involved and the contract at issue.
Get Answers to your Force Majeure Questions from a Qualified Attorney at Miller Law
If your company has received or expects to receive a notice of a force majeure event or a claim for commercial impracticability, or if you believe your company’s performance will be impacted by such an event, please contact the Miller Law Firm for a free consultation and assessment.