The Importance Of Force Majeure Clauses
On Often-Overlooked Boilerplate Provision Now Worth Examining
I recently posted a blog entry about the importance for businesses to review their contracts on a regular basis. One provision that I mentioned as worthy of being revisited is a force majeure clause. Legal contracts often include multiple “boilerplate” provisions that seemingly have nothing to do with actual business terms. While businesses accept the need for such provisions in their contracts, they often do not take the time to analyze them to see if they are necessary or if they should be revised.
A force majeure clause, also known as an “Act of God” clause, details what happens if an event (usually unforeseeable) occurs and is of such magnitude that it is impossible or nearly impossible for one or both parties to perform their contractual obligations. A force majeure clause likely contemplates some or all of the following: (i) when a force majeure clause can be invoked (i.e., must there be a complete interruption of business or just a significant delay); (ii) which party has to bear the cost or is the cost split between the parties; (iii) is there opportunity to either delay the provision of services/delivery of goods or payment or does the contract automatically terminate. While these clauses are typically triggered by natural disasters or acts of terrorism, the current Coronavirus/COVID-19 pandemic certainly has interrupted business activity all over the world. Depending on how the force majeure clause is drafted, the social distancing and business closure requirements resulting from COVID-19 may satisfy the criteria for a complete or partial suspension of contractual obligations.
If you find yourself unable to meet the terms of a contract, you should review the contract’s provisions to see if there is a force majeure clause. If one exists, then you must analyze whether it applies to your current situation and how you must invoke its terms (e.g., provide notice to your counterparty). Before invoking this clause, you should also consider whether invoking it may have a ripple effect on any additional business contracts you have. For example, if you have made a representation that you are in good standing on all of your obligations in a loan document, you may now need to notify your lender that you are invoking a force majeure clause in one of your contracts.
If your contract does not have a force majeure clause, you may still be excused from your obligations if performance under the contract becomes impracticable or impossible. The laws of the doctrine of impossibility apply differently in every state. As such, this doctrine will need to be analyzed within the parameters of the Governing Law clause of your contract. Further, if your contracts do not contain this provision, you should consider amending them to incorporate it, especially if the contract does not have a specific end date.