Introduction to Force Majeure
Force Majeure. It is a French term that, literally, means “superior force.” In the context of contract law, force majeure clauses are contractual provisions that may excuse a contracting party from performing its obligations if a triggering event occurs that is outside that party’s control and renders performance impossible or impracticable. Force majeure clauses are present in a variety of contracts, and it’s likely that most people, lawyers included, tend to think of a force majeure clause as common boilerplate language that rarely receives, or warrants, a second thought. In fact, many business lawyers and litigators may go the bulk of their careers without having to address the application of a force majeure clause.
The global COVID-19 pandemic and the dramatic economic adversity it has caused certainly will raise issues about the applicability of force majeure clauses in a wide variety of contractual settings. Force majeure clauses that may be triggered by the COVID-19 pandemic may now be important to all manner of businesses, including commercial landlords (and their tenants), banks and lenders (and their borrowers), construction companies (and their subcontractors), real estate developers, travel and transportation entities, and manufacturers and distributors.
A typical force majeure clause might list the following as the triggering events:
- an act of God, such as an earthquake, hurricane, tornado, flooding, or other natural disaster;
- war, actions of foreign enemies or terrorist activities;
- labor dispute or strike; and
- governmental action and sanctions, blockades or embargos,
- or failure of electrical service.
Force majeure provisions may also identify epidemics, pandemics and even quarantine restrictions among the triggering events. The applicability of whether a force majeure clause applies to a given situation will depend largely on the specific language of the provision in the contract at issue and, in particular, what the contract identifies as force majeure events and as prerequisites for invoking its protection.
The force majeure clause in a contract that has been rendered extremely burdensome or impossible to fulfill is obviously more likely to excuse performance if the force majeure events listed in that contract include “pandemic,” “epidemic” or like terms. Alternatively, even if the clause does not mention pandemics as a triggering circumstance, a reference to government action may suffice if a government-imposed “lockdown” is the apparent cause of non-performance. Courts may also find that “Acts of God” should be construed to include a pandemic, although that may depend on the character of the events that are specifically identified as Acts of God in the contract, and whether a pandemic may be deemed an event of a similar nature. Courts that, over the years, have considered whether an epidemic qualifies as an Act of God for force majeure purposes have come to differing conclusions, and the law is simply not established on this point.
Different States, Different Applications of Force Majeure
The law of force majeure has evolved with some distinctions between the states. Accordingly, it is essential that the applicable state law be examined to assess situations where force majeure has been, or might be, invoked. A brief review of caselaw in California, New York and Illinois reflects these distinctions that may exist between the states.
In California, courts do not limit force majeure clauses to events caused by acts of God. Rather, the test is whether, under the particular circumstances, there was such insurmountable interference, which occurred without the invoking party’s intervention, that it could not have been prevented with the exercise of prudence, diligence and care. Pacific Vegetable Oil Corp. v. C. S. T., Ltd., 29 Cal. 2d 228 (1946); Horsemen's Benevolent & Protective Assn. v. Valley Racing Assn., 4 Cal. App. 4th 1538, 1564, 6 Cal. Rptr. 2d 698, 713 (1992). The force majeure event must be out of the invoking party’s control such that the event could not have been prevented with the exercise of prudence, diligence and care; however, the actual event or circumstance that triggers invocation of the force majeure clause need not be specifically identified in the contractual force majeure provision.
Before invoking a force majeure clause, it is important to determine any notice provisions in the contract. Parties may expressly require in a contract that a party seeking to excuse performance give written notice to the other party within a reasonable time after the occurrence of the event. Cal. Civ. Code §1511. This is applicable when performance is prevented or delayed by operation of law, such as a governmental order.
When an event is within the scope of a force majeure clause, performance is not automatically excused. A contractual obligation or duty of care will not be excused for a mere increase in expense or inconvenience. There must be extreme and unreasonable difficulty, expense, injury or loss involved. Butler v. Nepple, 54 Cal. 2d 589 (1960). Courts will look at the facts to determine whether there is “extreme and unreasonable” difficulty, expense, injury or loss.
In New York, force majeure clauses are interpreted narrowly. Unlike California, a force majeure clause must specifically include the event that actually prevents a party’s performance in order for that party to be excused from performance. Reade v. Stoneybrook Realty, LLC, 882 N.Y.S.2d 8, 9 (2009). Force majeure clauses may also include “catch-all language” that is designed to include events not specifically listed in the clause. For example, some clauses may list specific qualifying events then conclude that performance is further excused for “any reason” beyond the control of a party. However, any event not expressly listed in a force majeure clause must still be of the same general kind or class as those events specifically mentioned for the force majeure clause to apply. Team Markeitng USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 943 (2007).
The event giving rise to a party invoking a force majeure clause must also be unforeseeable. Under New York law, force majeure clauses are interpreted to relieve a party of liability when the parties’ expectations are frustrated due to an event that is an extreme and unforeseeable occurrence that was beyond the party’s control and without its fault or negligence. Id. Generally, a non-performing party must demonstrate its efforts to perform its contractual duties despite the occurrence of the event that it claims constituted the force majeure. Phillips Puerto Rico Core, Inc. v. Tradax Petroleum Ltd., 782 F.2d 314, 319 (2d Cir. 1985). When a force majeure event occurs, New York courts have not excused an invoking party’s performance where that party is still able to carry out its obligation under the terms of the contract. Id.
Similar to California, performance is not automatically excused when an event is within the scope of a force majeure clause. Mere impracticability or unanticipated difficulty is not enough to excuse performance. Phillips Puerto Rico Core, Inc. v. Tradax Petroleium Ltd., 1984 WL 677 (S.D.N.Y. Aug. 2, 1984). Rather, performance must be objectively impossible. Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902 (1987). Contracts may also contain notice requirements that a party must heed when exercising a force majeure clause. Thus, it is important to carefully review the contract to determine whether notice must be given immediately or in any particular manner before invoking a force majeure clause to excuse performance.
In Illinois, like California and New York, the mere fact that a contract has become unexpectedly burdensome is seldom, if ever, enough to excuse performance. Ner Tamid Congregation of N. Town v. Krivoruchko, No. 08 C 1261, 2009 WL 10696538, at *14 (N.D. Ill. July 9, 2009). There is a general duty of good faith that requires a party to make an effort to dissolve the restraint that prevents the party from performing. This duty of good faith is read into all express contracts unless waived. Commonwealth Edison Co. v. Allied-Gen. Nuclear Servs., 731 F. Supp. 850, 858 (N.D. Ill. 1990).
Illinois has also addressed the effect a government order or regulation has on force majeure clauses. In order to constitute a force majeure event, a government order or regulation need not specifically direct a party to breach an obligation. However, the order or regulation must clearly direct or prohibit an act which proximately causes non-performance. N. Illinois Gas Co. v. Energy Co-op., Inc., 122 Ill. App. 3d 940, 951 (1984).
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Given that considerable litigation is likely to ensue regarding the application of force majeure, we can expect to see the law evolve in terms of how it is applied in the context of the COVID-19 pandemic. The force majeure clause in a contract that has been rendered extremely burdensome or impossible to fulfill is obviously more likely to excuse performance if the force majeure events listed in that contract include “pandemic,” “epidemic” or like terms. Alternatively, even if the clause does not mention pandemics as a triggering circumstance, a reference to government action may suffice if a government-imposed “lockdown” is the apparent cause of non-performance.
Notwithstanding the absence of any force majeure language in a contract, there are other legal doctrines, such as impracticability, impossibility and/or frustration of purpose, that may be operative in a situation where unforeseen and unavoidable forces have prevented performance. The attorneys at Tressler are available to consult and assist the wide variety of businesses that may now be impacted, whether it is those that are entitled to be excused from performance as a result of pandemic-driven difficulties or those that need to enforce their contractual rights against a party seeking to avoid its bargained-for obligations.
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