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Law Offices of Vance R. Koven | Latest Blog

May (or might) the Force Majeure Be With You?

Thursday, April 16, 2020




One of the hottest topics in business law to come out of our sequestered and economically chaotic pandemic times is whether parties to contracts (including among other things commercial leases) that have been made functionally useless by people’s inability to do business in the normal course can suspend or even cancel their obligations. In most situations they have their eyes on a ubiquitous bit of contractual boilerplate usually referred to as the “force majeure” clause. The concerns addressed here are far from academic: I've fielded plenty of questions from clients concerned, even existentially concerned, with how they're answered. The answers, as usual, depend on the wording of the clauses and some background law. As also usual, it’s complicated.

Let’s start with the background law. As you can see, the term “force majeure” isn’t English, it’s French. Sometimes, French or French-Latin terms have entered the common law (the legal system used primarily in Anglophone countries inherited from the English system dating from the days of Henry II) from the Normans (French) who administered the common law at the beginning. In this case, though, it’s a genuinely foreign term. It may come as a surprise, but in fact there is no legal doctrine of force majeure in common-law systems, though there is something vaguely similar (we’ll get to that in a bit).

So, what is force majeure? Getting it, as it were, from the horse’s mouth (de la bouche du cheval), the current French Civil Code puts it this way (my adaptation of a translation by Professors John Cartwright, Bénédicte Fauvarque-Cosson and Simon Whittaker):

Art. 1218. –In a contract, a force majeure exists when an event that is beyond the control of the person who owes an obligation and that could not reasonably have been foreseen at the time the contract was signed, and whose effects could not be avoided by appropriate measures, prevents performance of that obligation.

If the inability to perform is temporary, performance of the obligation is suspended unless the resulting delay justifies termination of the contract. If the inability is permanent, the contract terminates by operation of law and the parties are discharged from their obligations under the provisions of articles 1351 and 1351-1.

The relevant parts of articles 1351 and 1351-1 are:

Art. 1351. –The impossibility of performing an obligation discharges the party to the extent of that impossibility if it results from an event of force majeure, unless that party had agreed to bear the risk of the event or had previously been given notice to perform.

Art. 1351-1. –Where the impossibility of performance results from the loss of a thing that is owed, the party who has been given notice to perform is still discharged if (s)he proves that the loss would have occurred even if the obligation had been performed…

The common law does have a doctrine called “impossibility of performance,” and is in some ways similar to French Civil Code articles 1351 and 1351-1 (minus the “notice to perform”). If something happens after the signing of a contract that neither party could foresee at the time and that either destroys the subject matter of the contract (for example, if there’s a contract to buy a car and the car is totaled without the seller’s fault before it can be delivered to the buyer) or makes it impossible (not just hard, not even ruinously expensive, but actually physically impossible) to perform, then the parties are mutually excused. Case law in common-law countries has made this a very narrow exception that, unless courts choose to be extremely generous in light of current events, is not likely to be very helpful to most contractual parties. For example, in the car-wreck case, the failure to insure the car might defeat the impossibility requirement unless the car was some uniquely irreplaceable antique. And also note that this doctrine, like Articles 1351 and 1351-1, applies only to a permanent and total prevention of performance.

This gap in the law is why there are force majeure clauses in contracts—putting it into the agreement is the only way parties can make provision for the many things that, through no fault of a party, can make it unjust to hold the party to it, and to take into account that some impediments are merely temporary and should therefore result in a postponement rather than a cancellation of the obligation.

There is, of course, no single force majeure clause that applies in all cases, since every contract has its own context and is written by a different person representing the interests of a particular party. In particular, it is common for commercial transactional agreements to be worded differently from leases, and for merger agreements to be different from either. In proposing the text of a force majeure clause for a commercial agreement, for example, my go-to source for proper drafting, Ken Adams, has come up with this (which is far more intelligible and consistent than what you’re likely to see in most anybody else’s contracts, apart from mine):

FORCE MAJEURE. (a) If a Force Majeure Event prevents a party from complying with any one or more obligations under this agreement, that inability to comply will not constitute breach if (1) that party uses reasonable efforts to perform those obligations, (2) that party’s inability to perform those obligations is not due to its failure to (A) take reasonable measures to protect itself against events or circumstances of the same type as that Force Majeure Event or (B) develop and maintain a reasonable contingency plan to respond to events or circumstances of the same type as that Force Majeure Event, and (3) that party complies with its obligations under subsection (c).

(b)For purposes of this agreement, “Force Majeure Event” means, with respect to a party, any event or circumstance, whether or not foreseeable, that was not caused by that party [(other than a strike or other labor unrest that affects only that party, an increase in prices or other change in general economic conditions, a Change in Law, or an event or circumstance that results in that party’s not having sufficient funds to comply with an obligation to pay money)] and any consequences of that event or circumstance.

(c)If a Force Majeure Event occurs, the noncomplying party shall promptly notify the other party of occurrence of that Force Majeure Event, its effect on performance, and how long the noncomplying party expects it to last. Thereafter the noncomplying party shall update that information as reasonably necessary. During a Force Majeure Event, the noncomplying party shall use reasonable efforts to limit damages to the other party and to resume its performance under this agreement.

As you can see, there’s a lot more here than is dreamt of in French Civil Code Article 1218. Adams’s drafting differs from what you normally see by focusing not on the suspension of obligations but whether their non-performance creates a breach, by detailing precautionary measures, and also by not including a laundry list of things that do or don’t constitute force majeure (“Act of God,” war, riot, governmental intervention, and suchlike). You will also note several alternative or optional provisions in brackets. In many clauses that I have seen (and drafted), strikes are included in the list of things that are considered force majeure, even though conceptually they are things people can foresee (especially in unionized facilities) and, at sometimes considerable expense, avoid. In most clauses, foreseeability is an absolute prerequisite for claiming excuse (though I agree with Adams that foreseeability should count more towards the reasonability of the precautionary measures). And, most pertinently, the inability to pay money is a nearly universal exclusion from the clause, probably because the people expecting to receive the money are more likely to be the ones drafting the contract.

The money-payment exclusion is where so many issues and claims for relief raised by the current situation run aground. The government says (force majeure) that because of the (force majeure) pandemic you can’t operate your business, so you can’t make the money to pay the rent (or buy raw materials, pay your employees to work, or whatever). Sorry, that’s a money obligation, so not excused! This problem is exacerbated by the (probably obsolete but yet widely held) view that a lease is an interest in real estate as much as or more than it is a contract, under which it is considered that the parties’ obligations are independent of each other; in other words, even if the landlord is in breach of its obligations, you still have to pay the rent. In a recent blog post Adams has somewhat modified his clause to include the *results* of a force majeure event as part of the force majeure; but I don’t know if even such an extension would offset an explicit “insufficient funds” clause. Obviously, there will eventually be court decisions construing these clauses in light of the hardships the COVID-19 pandemic has caused; these cases will have to balance the claims of the contract obligors against the reality that the other contract party may have obligations that may be rendered impossible to meet, in a chain reaction of “my force is more majeure than yours.”

Recognizing that what’s written is written, and that contracts now in place aren’t about to be modified, can parties do anything going forward to make it clearer whether conditions that frustrate the performance of agreements can excuse their parties from performing them? One possibility, of course, is to tinker with that “money obligation” exception. I have sometimes been able to prevail with an argument that a inability to make a money payment can be excused when, rather than owing to a circumstance specific to the party, it is a result of a general failure of the banking and payment system (think, for example, of the bank holiday declared by President Roosevelt in 1933). That wouldn’t cover government *business* shutdown orders. But acknowledging that a “results” provision like Adams’s can override the money-payment clause, if tightly enough drafted and limited to a “duration of the crisis,” might prove sufficiently non-threatening that it could get past or win the assent of the party in position to receive the funds.