Tips for Negotiating Force Majeure Clauses in the Wake of COVID-19

March 30, 2020

“Force majeure” is a French phrase meaning “superior force.” It is also the name given to a common contract clause, which has the effect of excusing a party’s performance under the contract upon the occurrence of certain events beyond the parties’ control and which make a party’s performance under the contract impossible or unreasonably impracticable. Generally, these clauses include a list of various events or occurrences that may excuse a party’s performance, including acts of God, extreme weather events, and labor shortages. These events are often described or defined in contracts as “force majeure events.” Force majeure clauses are very common in a broad range of commercial contracts, including leases, supply and manufacturing contracts, and distribution agreements.

Force majeure clauses are often boilerplate language inserted at the end of contracts, and they are generally subject to little, if any, negotiation. However, the COVID-19 pandemic has caused the entire world’s economic landscape to become unrecognizable from that of just a few weeks ago. Vast portions of the economy are shut down. Businesses are being forced to close in efforts to curtail the spread of the coronavirus, causing them to be unable to fulfill their obligations under contracts to which they are a party. Now, the once overlooked force majeure clause will likely be a primary defense asserted by a contract party claiming that their performance under the contract was impossible or impracticable as a result of events stemming from the COVID-19 pandemic.

The enforceability of force majeure clauses generally hinges on various factors, one of which is whether the force majeure event was foreseeable at the time the contract was entered into. Health professionals are predicting that a vaccine for the coronavirus will not be widely available for at least 12-18 months. That leaves “social distancing” and “safer at home orders” to be the most effective way of keeping the virus from proliferating until a vaccine is ready for mass manufacturing and distribution. As a result, there will likely be further periods over the next couple of years where businesses will be forced to temporarily close to be compliant with government orders. Given that the enforceability of force majeure clauses generally depends, in part, on whether the force majeure event that made performance impossible or impracticable was foreseeable at the time the contract was made, parties are well-advised not to assume that events connected with the COVID-19 pandemic will excuse that performance in the future if the contract is not yet entered into.

For contracts that are currently under negotiation or are not yet entered into, where one or more party’s performance under the contract will be impacted by events or government orders relating to the COVID-19 pandemic, the parties should pay extra attention to negotiating the contract’s force majeure clause. The clause should include in its list of force majeure events references to epidemics, pandemics, contagions, and government orders relating to them. The parties may even want to expressly reference the COVID-19 pandemic and include specific examples of events related to the COVID-19 pandemic that will excuse performance, such as travel restrictions or business closures. The more specific the contract is tailored to the parties’ performance under the contract and to the transaction itself, the more likely it is that the contract’s force majeure clause will be effective to excuse performance. In addition, including language providing that the clause will be effective notwithstanding whether the event was foreseeable at the time the contract was entered into will increase the likelihood a court will find the clause enforceable.

Both trial and transactional attorneys will be grappling with force majeure clauses for the foreseeable future, whether litigating their enforceability or negotiating them for future contracts.  If you or your business are a party to a contract which has been or is likely to be breached and which contains a force majeure clause, contact an attorney at Axley for counsel on whether the clause may be invoked to excuse that breach. Likewise, if you or your business will be entering into a contract which requires future performance which may be impacted by the COVID-19 pandemic, attorneys at Axley are well-equipped to help in negotiating force majeure clauses to maximize their effectiveness and enforceability.