Prior to 2020, force majeure clauses were part of a checklist of boilerplate items in commercial contract construction but were scarcely litigated. Today, litigation over pre-pandemic force majeure clauses is skyrocketing. It is clear that the wording of contracts and force majeure clauses are more crucial than ever and essential for businesses.
What is a Force majeure clause?
Force majeure clauses are contractual provisions allocating risk and providing defense for non-performance when circumstances beyond the contracting parties’ control make contractual obligations impracticable or impossible. Every industry faces unique manufacturing, distribution, and transportation needs, causing the term of each clause to vary. Because force majeure clauses provide contract-based defenses against claims of breach of contract due to non-performance, parties in the post-pandemic world are focusing more on the language of those clauses. A company’s post-pandemic force majeure clause with a vendor in Columbus may differ from its force majeure clause with a vendor in Cincinnati. Where one force majeure clause may fail to excuse specific breaches, such as non-payment of certain obligations, others may excuse performance entirely.
Why the language matters
In a pre-pandemic world, a non-performing defendant could only prevail on an impossibility defense under a force majeure clause by showing that the event preventing performance was unforeseeable and beyond both parties’ control.
Post-pandemic courts construe force majeure clauses the same way they construe all contract questions: by looking at the document’s language and the facts of the case. Most courts faced with the question have interpreted force majeure clauses using terms such as “pandemic,” “natural disaster,” and “economic upheaval” to include COVID-19 for purposes of defense to claims of non-performance. Few courts are willing to excuse non-performance due to the pandemic absent such language, which is the case with many such clauses drafted prior to the pandemic.
Because the purpose of a force majeure clause is to limit damages following non-performance, it is common for courts to interpret them narrowly. Even if a court agrees that the parties could not have foreseen a global pandemic, it may find government-mandated shutdowns, transportation difficulties, funding, and employment issues as the real causes of non-performance– which are arguably more foreseeable than global pandemics. Courts will focus on the question of causation for non-performance, as it did pre-pandemic, which could produce findings that foreseeable, intervening events caused non-performance and not the pandemic.
Post-pandemic contract pillars
Language will be the guiding light moving forward in litigation surrounding force majeure arguments. Much of the current litigation focuses not on whether the pandemic caused the non-performance but where the parties stand following non-performance. Despite the need for carefully tailored force majeure clauses in post-pandemic commercial contracts, there are some standard pillars upon which the clause should be built:
- Define and limit the “triggering events” in response. Suppose your force majeure clause begins to wade too far into the weeds. In that case, a non-performing defendant can raise a defense of impracticability or impossibility (parties should still include a catch-all provision allowing for non-performance due to events out of the parties’ control). Without question, courts will now look at force majeure clauses for inclusion of pandemics as “triggering events,” which many pre-pandemic contracts did not include.
- Outline the extent of permitted non-performance. This outline should also include whether the “triggering event” excuses one or both parties from performance.
- The parties must establish a causal connection between the “triggering event” and the non-performance. In doing so, the parties should choose their language carefully because certain phrases may require or imply higher burdens of proof.
- The parties should provide consideration for progress made under the contract. Starting at the date of non-performance, outline what is required to be completed going forward, along with all other standard contractual provisions such as date, a form of notice, and mitigation efforts.
Business owners have found it challenging to get courts to agree to excuse non-performance for a COVID-19 triggering event. Courts will likely need to find the parties intended to include COVID-19 as a triggering event at the time they executed the contract and that COVID-19 itself rendered performance impracticable or impossible, as opposed to some other intervening and foreseeable event.
Careful research and analysis are critical components in commercial contract construction in our post-pandemic world. In the face of growing litigation related to force majeure clauses, carefully drafted force majeure clauses will provide necessary guidance and allow the parties to avoid costly litigation.