Hurricanes, wildfires, lightning strikes—and now, pandemics. These catastrophic events are aptly called “acts of God.” When they strike, parties to a contract turn to their "force majeure” clause, which excuses both parties from performing its duties. The clause is usually buried at the bottom and thrown-in as a piece of boilerplate legalese that everyone ignored. But when disaster strikes, the question becomes, does this catastrophe constitute an act of God, as it’s defined in the contract? As many discovered after the coronavirus pandemic in 2020, the answer can be very disappointing.
If the contract you negotiate lacks a force majeure clause entirely, or you are operating under an oral contract (where you never reached a force majeure understanding), you’ll be subject to a couple of default rules—rules that exist in the “common law,” a body of law that has been followed for centuries.
While these rules might appear to be sufficient, in practice they can be hard to apply. How burdensome must your performance be to excuse it? Should you have foreseen the event? As to the latter, experts’ dire warnings that the coronavirus might return, or another pandemic take its place, might make it very hard to claim unforseeability. It’s far better to tailor the force majeure clause to your best advantage.
Businesspeople who negotiate contracts know that the party with the superior bargaining power gets the favorable clauses. If you’re in the driver’s seat—you have a rare commodity or offer a unique service, for example—you’ll be in a good position to craft a clause that protects your interests. Ask your attorney to protect your interests on the following fronts.
Most force majeure clauses run both ways, excusing both parties in the event of an act of God. But it’s possible to have the clause protect only one side, leaving the other with nothing more than the common law rules of impracticability and frustration, explained above.
The range of obligations will depend on the subject of the contract. In a lease, for example, a landlord will not want to excuse the tenant’s duty to pay rent, leave at the end of the lease term, and maintain any required insurance. The tenant will want to preserve the landlord’s duty to return the security deposit, honor any tenant improvement payments, and preserve any option rights.
The definition of a force majeure is one of your most important considerations. When the clause will relieve you of your responsibilities, you’ll want it to be as broad as possible. Conversely, you’ll want it to be narrow when it excuses the other side’s duties.
If you use adjectives like “unforeseen,” “tragic,” and “natural,” you’re decreasing the clause’s reach. Courts generally define these terms quite narrowly.
Defining a force majeure as any act, event, or circumstance beyond the party’s control, that wasn’t caused by that party’s negligence or failure to exercise due care, gives you a far-reaching clause. Common examples of listed events are set-out above, in “Acts of God.”
Some clauses recite the specific acts noted above, then end with a catch-all definition, like “…or any other events not within the reasonable control of the party affected.” But because the catch-all is so vague, a court might not enforce it, making it useless. To forestall this result, you can include a phrase preceding the enumerated events that makes it clear that these events aren’t the only ones that can constitute an act of God: “...including but not limited to [listed acts].”
Although a tightly written definition should protect you from most creative claims, you might want to anticipate a few and specifically exclude them. You won’t, for example, want to excuse performance if the other side could have reasonably prevented or mitigated the resulting loss or damage. You can even specifically exclude the non-availability of equipment, personnel, or supplies that the other party could have anticipated. Many would argue that our collective experience with the coronavirus (preceded by Legionnaires’ Disease, SARs, MERs, Zika and Ebola), coupled with predictions of a resurgence or a new virus, makes it clear that businesses should anticipate their appearance and prepare accordingly.
The notice clause in a contract or lease is often overlooked as a mere formality, and time frames for some rights (such as option exercises) can be comfortably long. But if either side decides that the force majeure clause is in play, it’s important to let the other side know quickly, typically within 24 hours. The claiming side should share information, such as how long it expects the state of affairs to last; and it should allow for inspection and require regular, written updates.
Doing what you can to control and lessen the damage that results from a contract breach—called “mitigating damages”—is an age-old common law rule. You can’t just sit back and watch things disintegrate, if you could take steps to reduce the damage. Your force majeure clause should require the claiming party to take all “commercially reasonable steps” to lessen the impact of the act of God. You can’t name all such steps, but for example, they would include looking for alternate locations to carry on a business (including working from home), finding different suppliers, and so on.
Finally, consider the all-important question of whether the duty that’s at issue is being excused temporarily or permanently. The nature of your contract will often make the choice clear, but not always. For example, if the contract between you and a commercial painter can’t be performed because the building is closed due to shelter-in-place orders, do you want the painter’s obligations to be excused, or just postponed—and for how long? In addition, consider making the obligation (such as a lease) expire altogether if the delay lasts more than a specified time.