Business Considerations of Force Majeure: Unintended Consequences
No doubt by now your inbox has been filled with questions, recommendations, and articles about the use of force majeure clauses in response to the COVID-19 pandemic. With all of the focus on whether force majeure clauses can be invoked, little attention has been paid to whether they should. Excusing or delaying performance may seem sensible in the current economic environment, but self-excusing performance by invoking contractual force majeure provisions may have unanticipated adverse consequences down the road that businesses should consider.
As a refresher, a “force majeure clause” is generally defined as a “contractual provision allocating the risk if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled.” Black’s Law Dictionary 674 (8th ed. 2004). Courts routinely construe these clauses narrowly, recognizing that common law rules “merely fill in the gaps” left in the agreement. In the case of COVID-19, whether a force majeure clause can be invoked may be an easy call if the parties expressly included “pandemic” among the specified “force majeure” events in the contract.
If not, the inquiry becomes a bit more complicated. In many instances, the inquiry likely turns on whether the contract includes a broad “catch all phrase” and the law of the particular jurisdiction interpreting this language. Many force majeure clauses include catch all language such as those identifying acts “beyond the parties’ reasonable control” or the like. In Texas, the invoking party must demonstrate it was unable to exercise reasonable control over the event and its effect, and that the event is the sole cause of the inability to perform.1 By contrast, the Idaho Supreme Court held a force majeure clause containing “outside the reasonable control language” was broad enough to encompass the developer’s permit denial.2 However, no reported case appears to have specifically addressed the issue with regard to any previous outbreak on this scale, and certainly not in the case of COVID-19. Further, whether Courts will find that the current pandemic are enforceable “acts of God” or “acts of government” in contracts containing that language remains an open question and may vary by jurisdiction. The lesson is that, regardless of jurisdiction, the legal outcome will turn on the specific contractual language and facts.
Even if you can (successfully) invoke force majeure to excuse or delay performance, should you? Conversely, if a force majeure clause is invoked by someone should you contest it? Companies should carefully consider the law of unintended consequences before they act.
Business Considerations
Legal Costs
Not only are lawsuits expensive and time consuming, but in the current environment where courts have shut down or delayed proceedings, obtaining a decision may take even longer.
Financial Risk
For a party considering whether to invoke a force majeure clause, what is the potential exposure for damages if a court or jury ultimately determines that the clause does not apply and was improperly invoked? Is there a contractual limitation on damages? Is there a condition placed on the force majeure event, such as requiring performance to resume after some specified period? An equally important consideration for the non-invoking party is the financial capacity of the party to actually pay any damages ultimately awarded if later determined to have been improperly invoked. In some scenarios, contracts or statutes also allow the prevailing party recover attorneys’ fees.
Future Business Prejudice
Legal rights and maintaining business relationships are not always aligned. When businesses call upon their vendors, suppliers, partners, etc. in the future, will the invocation of force majeure imperil those relationships? Will it cause other vendors, suppliers, etc. to reconsider doing business with you in the future?
Business Reputation and Credit Risk
In addition to public lawsuits, information regarding businesses and their credit worthiness are readily available through search engines and paid services. Although it may be protected by confidentiality orders, businesses will inevitably have to produce confidential financial information in the course of litigation.
Public Perception
In a time of community-wide lockdowns and stay at home orders impacting over 90% of the United States, how will a judge or jury perceive a business insisting on performance of contracts for non-essential services or products? Conversely, how will the court of public perception view a party who self-invokes and excuses performance when other businesses are finding ways to perform despite the obvious impediments? The answers to these questions remain uncertain. Only time will tell.
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1 See e.g., Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d 277, 287 (Tex. App.—Amarillo 1998, writ denied) (denying force majeure defense to excuse oil production where there were other potentially available options within the invoking party’s control).
2 Burns Concrete, Inc. v. Teton County, 384 P.3d 364, 367–68 (Idaho 2016).
