The rapid spread of the coronavirus in recent weeks is affecting supply chains, logistics, and services, as factories cannot obtain manufacturing materials, international borders are closed, and non-essential businesses are on lockdown. Often, commercial contracts contain a "Force Majeure" clause, permitting a party to suspend its performance due to acts, circumstances or events beyond its control. In light of the coronavirus pandemic, can the contractual obligations of suppliers and service providers be suspended for as long as the force majeure event continues without a breach of contract if the contract contains a force majeure clause?
This article series examines how force majeure events are evaluated under US law. Part 1 discusses the definition (or lack thereof) of force majeure and how courts determine whether a force majeure event has occurred. In light of this, Part 2 will then outline key points to consider when drafting force majeure clauses. Finally, Part 3 will summarize additional legal doctrines for stopping performance under a contract: frustration and impracticability.
Definition of Force Majeure
Although force majeure events are generally understood to mean an act, event or circumstance beyond the responsible control of party, under common law, there is no recognized definition of force majeure. In the United States in particular, there is not a single standard or definition of proof for force majeure. There are no federal guidelines or specific tests an event must meet to be considered force majeure, in contrast to some civil law jurisdictions. Instead, to determine if a force majeure event has occurred (and therefore if a force majeure clause is enforceable), the courts look to the language of the contract.
As a practical matter, the courts would get involved when one party to a contract suspends its performance, claiming there was a force majeure event and that the contract's force majeure clause applies, but the other party doesn't agree and sues the first party for breach of contract and damages. The courts, in the context of the claim, would have to decide if a force majeure event has happened and if performance should be suspended. The party invoking the force majeure clause has the burden of proof to show that the clause would apply.
It would be up to the court to decide if a force majeure event really took place and if a supplier can rely on that defense. If the court decided that a force majeure event did NOT occur, then the supplier would be in breach of contract and liable for damages.
Interpreting Force Majeure Clauses and Events
As noted above, the courts look to the language of the agreement to determine if a force majeure event occurred. Courts in the US defer to the intent of the contracting parties when interpreting and enforcing contracts. In particular, with respect to force majeure, ".when the parties have defined the nature of force majeure in their agreement, that nature dictates the application, effect, and scope of force majeure with regard to that agreement and those parties, and reviewing courts are not at liberty to rewrite the contract or interpret it in a manner which the parties never intended." (Specialty Foods of Indiana, Inc. v. City of South Bend, 997, p. 27 N.E.2d 23 (Ind. Ct. App. 2013)).
If a party invoked a contract's force majeure clause and suspended its performance, but the other party didn't agree there was a force majeure event, the non-suspending party would sue the suspending party for breach of contract and for damages. This suit would go to the courts. In that suit, the suspending party would claim a defense of force majeure. That party would have to prove that the event hindering its performance falls within the scope of the contract's force majeure clause. It would also have to show that but for that event, it could still perform under the contract. It would also have to show that it followed the requirements under the force majeure clause.
When assessing a party's claim of a force majeure event, a court would first examine whether the specific event is covered by the definition of force majeure in the contract clause. With respect to the coronavirus, if a contract's force majeure clause specified epidemics (or disease or pandemics) as an event of force majeure then the courts would consider the coronavirus to be an event of force majeure. If however this specific reference to epidemics is missing, but the contract has general language defining force majeure (such as 'unforeseeable events beyond a party's reasonable control') then the party invoking force majeure, has the burden of proof to show that the event (e.g. coronavirus) falls within the scope of the events covered by the contract's force majeure clause.
Second, the courts would examine how the force majeure clause operates in the contract. For example, if the contract states that the force majeure event must cause a party to "fail to satisfy its obligations under this contract", then the party invoking force majeure has to prove that it cannot legally or physically perform its obligations due to the event. It is not enough that the performance would be difficult or unprofitable or increase a party's costs. The party must be unable to perform due to the force majeure event. Moreover, the inability to perform must be caused only by the force majeure event. The party claiming force majeure would have to explicitly show that but for the event (i.e. but for the epidemic that is a disruption/interference of trade) it would be able to perform under the contract (L&A Jackson Enterprises v. U.S. 38 Fed. Cl. 22, p. 44 (1997) (aff'd 135 F.3d 776 (Fed. Cir. 1998)).
Third, the party claiming force majeure must show that it has taken all reasonable steps to avoid or mitigate the event and its effect on its contractual performance. And it must show it complied with all relevant contractual provisions related to the force majeure clause. Any contractual conditions placed on the party when claiming force majeure, must have been satisfied ("American Jurisprudence", 2nd ed, Act of God, Marie K. Pesando, Chapter IV Effect on Liability"). For example, if the contract's force majeure clause requires a party to provide notice of the extent and probable duration of the force majeure event, the party must show that it has provided this notice. If the contract requires a party to "diligently attempt to remove the cause of the force majeure event" the party must show the court it has done this. The party invoking force majeure must follow the obligations put on it pursuant to the contract's force majeure clause.
If a party cannot provide this proof, then the court would find that party cannot rely on the force majeure clause. It would be in breach of contract and liable for damages.
In our next article we will list the key points to consider when drafting force majeure clauses.
Originally published March 27, 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.