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What is ‘force majeure’? The legal term you’ll be hearing a lot during the coronavirus crisis

Businesses that find it impossible to fulfill contracts may be saved by clauses that void the contract due to acts of god. But “not all force majeure clauses are created equal.”

What is ‘force majeure’? The legal term you’ll be hearing a lot during the coronavirus crisis
[Source Images: Katerina Sisperova/iStock, Mariakray/iStock, Amadeus Moga/Unsplash]

In 2015, as Ebola spread across Western Africa, the Moroccan government turned to an esoteric legal concept to postpone that year’s African Nations Cup: force majeure. It’s a common clause in legal contracts that allows either party to limit their liability in the face of some unforeseeable, extraordinary event. Morocco, which was set to host the biennial soccer tournament, claimed that the Ebola outbreak qualified.

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But force majeure is notoriously difficult to establish. In that case, the Court of Arbitration for Sport ruled that Ebola did not constitute “force majeure,” because the deadly virus had not made hosting the event impossible—just more difficult. Morocco was held liable, and fined $1 million.

Even if a party can show COVID-19 or its effects are covered by the clause at issue, it still has the task of demonstrating . . . that performance is truly impossible rather than merely financially difficult.”

As coronavirus continues to force major business disruptions, this extraordinary act clause is becoming increasingly pertinent. “Force majeure” translates literally as “superior strength,” and refers to unforeseen calamities ranging from natural disasters like hurricanes or avalanches, to manmade emergencies, such as labor strikes or wars. But what about an unpredictable, highly infectious pandemic zoonotic virus?

COVID-19 is likely to again affect sports (there’s a force majeure clause in the NBA players’ collective bargaining agreement specifically related to pandemics that may halt their compensation) and the big brands we know, as well as smaller businesses that keep day-to-day life ticking along. A supplier’s factory may get infected and shut down, say, meaning that supplier can’t provide the items it promised to buyers. Or, a trucking company may halt delivery to infected areas, meaning goods aren’t transferred by the formally agreed date. These businesses may or may not have the right to invoke force majeure.

Fast Company spoke to two global law firms to help us decipher the muddy legal term, and how it’s likely to play out given city lockdowns, stay-at-home orders, and widespread economic instability inflicted by COVID-19. Both firms say the term has become a priority within their offices, and one that’s likely to spring up more and more, as businesses struggle to satisfy contracts.

“Generally, a force majeure event is an event that is beyond the affected party’s reasonable control, and could not have been foreseen, or, if the event could have been foreseen, is an event that was unavoidable,” say Alexandro Padrés and Alyssa Cowley, partner and associate, respectively, in the Project Development & Finance practice from Shearman and Sterling in an email.

Specific force majeure events have to be explicitly mentioned in the contract, for the clause to be invoked. That creates a gray area for pandemics, epidemics, and quarantines, which are less commonly included. Some mention them explicitly—like the NBA bargaining agreement—but this is largely new territory. If it’s not in the contract, though, the court may choose to judge the case using local jurisdiction or common law.

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It’s worth noting that the coronavirus itself doesn’t have to be the force majeure event, just any demonstrative effects it produces. “Instead, it can be that the consequences of the pandemic (for example, port shutdowns, delays in transportation, etc.) give rise, separately, to force majeure claims because they affect a party’s ability to perform its contractual obligations,” Padrés and Cowley say.

Not fulfilling a contract has to be viewed as an impossible feat, rather than just simply impractical (think Morocco). Fears of the virus also wouldn’t cut it, even under common law: In an English case from 1922, which set precedent, Hackney Borough Council v. Dore, the judge said, “The expression means some physical or material restraint and does not include a reasonable fear or apprehension of such a restraint.” So, a company may still be obligated to pay a venue for an event it’s unwilling to go ahead with; and a major sporting competition that cancels due to fears of outbreaks among fans may still have an responsibility to media buyers and corporate sponsors. In these instances, force majeure simply may not cut it.

“Even if a party can show COVID-19 or its effects are covered by the clause at issue, it still has the task of demonstrating that the risk of nonperformance was unforeseeable and could not be mitigated, and that performance is truly impossible rather than merely financially difficult,” says Jaren Janghorbani, a partner in the litigation department at the firm Paul, Weiss.

This came up frequently in contract disputes in the aftermath of the 2008 economic crash, when many courts ruled that financial difficulty did not fall under force majeure. “The financial inability to perform is generally not excused by force majeure clauses. Changes in the cost or availability of materials, components, resources/services, or changes in market conditions will be specifically excluded from the definition of ‘force majeure event,'” say Padrés and Cowley.

It is possible that an event of this magnitude could shape the law in ways we cannot currently predict.”

While the U.S is only at the beginning of the financial implications of the crisis, Janghorbani says force majeure is already starting to become an issue with Chinese contracts: “The Chinese government issued force majeure certificates exonerating certain companies for contractual non-performance resulting from COVID-19; those certificates may or may not be recognized under contracts governed by U.S. law.”

What will happen in the U.S? The lawyers say it’s hard to know how courts will rule, but if a company is in breach of contract and tries to invoke force majeure and loses, courts could also force them to pay monetary damages. All the lawyers say the best course of action going forward is for both parties to any contracts be willing to be flexible now in an attempt to avoid legal proceedings. “Open and honest communication with counterparties and their subcontractors will be key to handling the consequences of the pandemic, particularly in complex transactions or supply chains,” say Padrés and Cowley. “Alternative and creative solutions will be necessary.”

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But what happens going forward could have major implications for contract law. “It is possible that an event of this magnitude could shape the law in ways we cannot currently predict, as courts may be faced with calls to liberalize the force majeure or common law analyses in light of market realities,” says Janghorbani.

It’s a murky provision in the best of times, so clarification could be welcome. “Not all force majeure clauses are created equal,” say Padrés and Cowley, “and different governing laws afford different levels of protection.”

What’s more, decisions about whether coronavirus qualifies as a force majeure event will affect entire supply chains, causing a ripple-down effect—one broken obligation, or invocation of the clause, can domino into many others down the line. “Thus, we end up with a ‘race to the bottom,'” say Padrés and Cowley. “A party along the supply chain without cover or excuse under force majeure is left holding the proverbial bag.”

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