Force Majeure Contract Tips

Posted on October 15, 2020

Originally published in October 2020

What Is Force Majeure?

Force Majeure is an unforeseeable circumstance that prevents someone from fulfilling a contract. Most contracts may have a specific definition of force majeure, but it isn’t necessary to have. Generally, such a provision covers natural disasters, wars, and other extraordinary events that make performance of a party inadvisable, commercially impracticable, impossible or illegal.

How Does Force Majeure Affect a Contract?

Unlike illegality of a contract at its inception, which renders the contract void, force majeure has a different effect. Force Majeure will typically DELAY or EXCUSE performance of a given party.

If a road was closed because of a snow storm, and a truck could not travel across a given highway, force majeure would generally excuse such trucker’s timely delivery. If manufacturing or other business processes were forbidden to take place during a COVID-19 related shutdown, such performance would be excused.

What Exactly Constitutes Force Majeure?

If we don’t specifically have a definition in an agreement, it will be up to case law.

If we do have an agreement, we would generally follow the contract language.

Some examples are:

Wars
Weather
Acts of God
Labor issues / Strikes
Supply and raw materials shortages
Performance of subcontractors
Unforeseen circumstances not known at the time of entering into the contract

All of these can all be included OR excluded in the contract language.

What Should I Do If I Encounter a Force Majeure Event?

Communicate with the other party. Let them know what the circumstances are, and when the earliest possible time of delivery will be. Coming to an agreement/acknowledgment is always better than litigation.
When communicating, because force majeure is a formal contract requirement, follow the notice provisions of your contract to the letter. If registered or certified mail is required, follow up with this action, even if it is to confirm a phone or e-mail discussion for which the original communication was sent.
Document the circumstances as best possible in case it is challenged whether a true force majeure event occurred.

How Long Does Force Majeure Last?

Force Majeure can last indefinitely; or it can be extremely short. Generally speaking, such events are typically limited to not exceed 30 days in contract language; however "not to exceed 90 days" is not out of out the ordinary. If the maximum time is reached, the other party can generally terminate the contract without cause.

Other Impacts of Force Majeure

Loan Covenants: What happens when a business has been shut down or limited by the current pandemic? Yearly tested loan covenants might be triggered.
Lease Agreements: Are you required to pay your lease in the event your shopping center or location has shut down access to your leased premises?
Are there other laws that also may apply? What about provisions under the UCC to the extent sales/leases of goods are involved?
What about impossibility of performance?
What about minimum delivery requirements for contracts?
Does the agreement get extended for the force majeure event, or are parties simply resolved of their obligations during such time?
Good faith and reasonableness standards generally apply.

Originally published in October 2020