When God Appears in Contracts, That’s ‘Force Majeure’
(Bloomberg) -- The coronavirus crisis has given new relevance to the legal term “force majeure.” It’s a clause that can be found buried in many contracts that lets a party off the hook in the event of some unforeseen “act of God.” After much of the world’s economy temporarily shut down due to the pandemic, companies began invoking force majeure to reject supplies they say they don’t need or to get out of leases they say they can’t afford.
1. What is force majeure?
French for “superior force,” the phrase typically describes an unexpected, external event that makes it impossible for a party to fulfill its obligations under a contract. Force majeure clauses are a common feature of supply agreements and other business deals, and consumers will also find them in the fine print they agree to when they buy such things as plane tickets. Natural disasters such as earthquakes, hurricanes and floods are frequently specified as force majeure events. So are human activities such as war, political unrest, terrorist attacks and labor strikes.
2. Does the coronavirus count?
Outbreaks and epidemics are occasionally listed as force majeure events, though courts don’t have a lot of experience deciding whether a particular disease fits the bill. That may not be critical when it comes to the coronavirus. The closures and other unexpected disruptions that have accompanied the spread of the virus bear “all the hallmarks of force majeure,” said Dallas-based lawyer Beth Petronio, noting the disease’s effects on businesses have been comparable to those of a hurricane or other large-scale natural disaster.
3. How is force majeure invoked?
Often it’s as simple as one party declaring force majeure in a letter to the other.
4. What kinds of contracts are likely to be involved?
Given the scale of disruption, it could conceivably come up in just about any commercial contract. Interrupted supply agreements are an obvious example. Another widespread concern is the ability of commercial tenants to pay rent on stores and offices that have been designated non-essential businesses by the authorities and told to close. One New York law firm has already claimed force majeure to try to get out of its lease. Landlords have some incentive to work things out, but many face their own contractual obligations to mortgage lenders and investors.
5. What if a counter-party disagrees?
One party can challenge another’s invocation of force majeure in court. The decision may hinge on the specific language in the contract and the jurisdiction. Many international commercial contracts operate under English or U.S. law and specify courts in London or New York to decide any disputes. Chinese authorities can issue force majeure certificates, which give “a certain authenticity” to a declaration, said Brian Perrott, a partner at HFW law firm and former head of litigation at Cargill Inc. “But ultimately you have to establish that a clause is triggered.”
6. What if a contract doesn’t include a force majeure clause?
In the U.S., the law in many states still provides relief to a party if its performance is made impossible or impracticable by unforeseen outside events, said Jennifer Semko, a partner with Baker & McKenzie LLP in Washington. In California, for instance, the civil code excuses failure to perform a contract “when it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States.” Many jurisdictions will also terminate a contract if an event occurs that totally frustrates its purpose. In a landmark 1903 case, an English court said a man didn’t need to pay a day’s rental on an apartment overlooking the coronation procession of King Edward VII after the event was postponed due to the new monarch’s illness. On the other hand, some agreements, particularly those in the field of equipment leases, might include so-called hell-or-high-water clauses, which are designed to make sure the terms are honored no matter what.
7. What’s ‘price majeure’?
It isn’t a legal term but a joke among traders about some buyers using any excuse to walk away from a contract when prices have moved against them.
The Reference Shelf
- The World Bank’s checklist and sample wording for force majeure clauses.
- A South China Morning Post story on a force majeure “escape clause.”
- New York law firm Paul Weiss sent an advisory to clients about force majeure and the coronavirus.
- Another law firm, Hill Dickinson, offers its advice.
- International law firm Baker & McKenzie addressed alternatives to force majeure in a March 6 article.
- Additional QuickTakes on the spreading virus, how the fight against it is working and the difficulty in finding a cure.
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