Supply Chain Survival Series: Force Majeure (Article #9)

In our previous article, we discussed anticipatory repudiation and demands for adequate assurances—legal concepts that may arise when a party to a contract expects that its counterparty may not perform its end of the bargain. This article discusses a related concept, force majeure, which can actually excuse a party from performing its obligations, but only in narrow circumstances.

What Is Force Majeure?

The term force majeure comes from a French phrase meaning “superior force.” A force majeure provision in a contract typically refers to events that the parties did not anticipate and could not reasonably control. The purpose of a force majeure clause is to permit an excuse or delay in performing a contract when unforeseeable events occur. What force majeure clauses typically not do is provide parties a right to raise their prices or change the terms of a contract if performance becomes difficult or costly. These clauses are meant to allocate risks when the unforeseeable happens—not to provide parties an incentive to capitalize on an unexpected hardship. Common examples of force majeure events include earthquakes, floods, wars, government interventions, and “acts of God.” These disasters were often viewed as boilerplate covers until the COVID-19 pandemic disrupted supply chains and brought force majeure clauses into the forefront of legal discussions.

How Are Force Majeure Clauses Interpreted?

Force majeure is a creature of contract and common law (not the UCC), which not only means that a force majeure argument will fail if your contract does not have an express force majeure provision, but also that these provisions vary from contract to contract—and in their interpretation by courts. Most courts will interpret force majeure provisions narrowly to uphold the general principle that parties should be able to enforce their contracts, not be excused from performing them. Well-written clauses are generally those that adequately define the force majeure event, the performance that will be excused, the causal connection between the event and excused performance, and the resulting circumstances. But there’s an interesting irony here; a minority of courts view the ability to identify a certain risk as an admission that the event was foreseeable, and therefore not a valid force majeure event.¹ So no matter how well-drafted a force majeure provision may be, parties should be aware that it may be difficult to enforce in some jurisdictions.

Critically, force majeure clauses typically do not excuse performance where performing the contract has become more difficult or more costly. For example, even if a true force majeure event, such as a hurricane, disrupts the supply of raw materials, force majeure will not excuse performance if you are able to obtain the materials elsewhere, even at grossly inflated prices.

In 2020, the question became whether a pandemic could be a force majeure event that would excuse a party’s performance. The answer depended on the contract, but in many cases, that answer was no. Often, either the force majeure provision was written too narrowly to encompass pandemics, or the force majeure event did not sufficiently prevent performance of the parties’ obligations. For example, a clause that excused performance for narrowly-defined events like earthquakes, floods, and acts of war, not including a pandemic, natural disaster, or act of government likely would not have permitted a party to avoid its obligations to supply products—even at the height of COVID-19.² And, even if a force majeure clause specifically mentioned pandemics, these clauses typically required that a party show that the force majeure event actually prevented the performance of their contractual obligations. So, a company that voluntarily curtailed business operations during the pandemic, or refused to raise wages to maintain a labor force sufficient to perform, would have a difficult time showing that this was excused under a typical force majeure clause.³

Nevertheless, in some cases arising out of early 2020 government shutdowns, courts agreed with parties that the pandemic provided an excuse to performing a contractual obligation—typically where a contract referenced “pandemic” or “orders of government,” and where the government action actually prevented a party from performing. However difficult this argument was in 2020, it may be even more challenging today. As 2020 has faded into the rearview, courts have expected parties to adjust and have treated the pandemic as less novel.

What Obligations May Parties Have When Force Majeure Arises?

The occurrence of a force majeure event by itself may not always excuse performance. Many agreements will require that the party seeking to enforce the force majeure provision provide its counterparty notice—either within a reasonable or a defined period of time. Failing to provide appropriate notice may constitutes a waiver of a party’s ability to enforce a force majeure provision. But even if your contract does not contain a notice period, it is sound business practice to notify the other side of your decision to invoke force majeure.

Force majeure provisions typically only excuse performance to the extent of and for the duration of the force majeure event. Contrary to many parties’ beliefs, force majeure may not permit a party to cancel the contract and cease all future performance, where there is some ability to perform in the future.

If your counterparty invokes force majeure, even if you believe it is not applicable, you are still obligated to mitigate your damages caused by the other party’s failure to perform, which often means attempting to find an alternative supplier. Indeed, if force majeure does not excuse your counterparty’s performance, you will still be required to demonstrate that you mitigated damages to the extent possible to recover damages for the breach.

What If My Contract Does Not Have a Force Majeure Provision?

If your contract does not include a force majeure provision, you may have other avenues for avoiding performance, including impracticability or impossibility arguments, which we intend to discuss in a future article.

A Drafting Note on Force Majeure Clauses.

When companies learned that force majeure clauses provided less protection than they thought, especially during the pandemic, many companies revised their force majeure clauses to allow for greater protections in the event of a force majeure event. This may include the right to price increases if force majeure increases costs to perform, or terms that excuse performance entirely if force majeure makes performance no longer profitable. Because these clauses are creatures of contract, parties can agree to significant deviations from what is customarily thought of as “force majeure.” What was once a boring, boilerplate clause in a contract must now be reviewed carefully to ensure the parties are aligned on when performance may be suspended, excused, or modified. Many companies should consider whether the force majeure clause in their standard terms and conditions appropriately protects their interests.

If you have any specific questions on this article, please contact your Quarles attorney:

• Patrick Taylor: (414) 277-5523 / patrick.taylor@quarles.com
• Brandon Krajewski: (414) 277-5783 / brandon.krajewski@quarles.com

• Lauren Zenk: (414) 277-5242 / lauren.zenk@quarles.com

Quarles attorneys Michael Chargo, Hannah Schwartz and Rachael Brodd also contributed to this article.

END NOTES

¹ Erin Webb, Analysis: No Longer Unforeseeable? Force Majeure and Covid-19, Bloomberg Law (Nov. 1, 2021), available at ANALYSIS: No Longer Unforeseeable? Force Majeure and Covid-19 (bloomberglaw.com).

² Ryan Franklin and Nicholas Wind, Force Majeure Clauses in the Aftermath of the Covid-19 Pandemic and the Implications for Government Entities, ABA Government and Public Sector Lawyers Division (March 14, 2022), available at Force Majeure Clauses in the Aftermath of the Covid-19 Pandemic and the Implications for Government Entities (americanbar.org); Edwin J. Broecker, Force Majeure and Acts of Government, Lexology (Sept. 8, 2017), available at Force Majeure and Acts of Government - Lexology.

³ Id.

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