If You’re Planning to Use a Force Majeure Clause to Terminate a Contract, Look Before you Leap
Brian J. Massimino • March 26, 2020
In this age of corona-created uncertainty, there is very little good news for businesses. The White House has declared a national state of emergency. The Centers for Disease Control and Prevention (“CDC”) recommends avoiding gatherings of 10 people or more. Air travel has dropped to drastically low levels. The reduction in travel alone has massive implications for related services, including lodging, meals, and entertainment. Fear and anxiety will likely usurp calm and rational business decision making for the foreseeable future.
All of these events have conspired to create even more uncertainty. Business owners and decision makers are certainly looking at all available options to protect their business. It would make sense for anyone to do a quick word search in his or her contracts for “force majeure.” Chances are, however, that the force majeure clause may not provide the escape most businesses hope.
What is a force majeure clause? A force majeure clause is a contractual provision included in most business contracts. These clauses are intended to permit the contracting parties to agree in advance what “Acts of God” would excuse a parties’ performance all together or permit an extension of time to perform. Typical “Acts of God” include extreme weather and seismic events. Many times parties expand the force majeure clauses to include strikes, acts of war, terrorism and other related events.
However, just because a party claims an event is a “force majeure”, it does not necessarily make it so. Any court reviewing a force majeure claim will undoubtedly focus on the precise language that parties included in the contract. PPG Industries v. Shell Oil Company, 919 F.2d 17, at 18 (5th Cir.1990) (“Instead, they should look to the language that the parties specifically bargained for in the contract to determine the parties' intent concerning whether the event complained of excuses performance.”)(emphasis added). After all, the contract is intended to reflect the benefit of the parties’ bargain.
An example from recent history may be helpful. In November 2000, a company made plans to host an industry event at a resort in Hawaii. OWBR LLC v. Clear Channel Commc'ns, Inc., 266 F. Supp. 2d 1214 (D. Haw. 2003). The event was scheduled to take place in February 2002. The parties included the following force majeure language in their contract:
The parties' performance under this Agreement is subject to acts of God, war, government regulation, terrorism, disaster, strikes (except those involving the Hotel's employees or agents), civil disorder, curtailment of transportation facilities, or any other emergency beyond the parties' control, making it inadvisable, illegal, or impossible to perform their obligations under this Agreement.
Following the terrorist attacks of September 11, 2001 and the travel restrictions that ensued, the defendant sought to terminate the agreement citing the above clause. They argued that holding the event was “inadvisable” due to potential attendees’ “fear and uncertainty” related to air travel. Defendants further argued that they were permitted to terminate under the force majeure clause.
The Court disagreed. While recognizing the “extreme” and “unforeseeable” nature of the attacks on September 11, 2001, the Court determined that:
[A] force majeure clause does not excuse performance for economic inadvisability, even when the economic conditions are the product of a force majeure event. The Force Majeure clause does not contain language that excuses performance on the basis of poor economic conditions, lower than expected attendance, or withdrawal of commitments from sponsors and participants.
Id. at 1223–24 (emphasis added) (internal citations omitted). In other words, the Court strictly interpreted the precise language of the parties’ agreement and determined that it did not extend as far as defendants argued.
Interestingly, if the above facts were repeated in present day and it was the coronavirus pandemic (and not the terrorist attacks) that prompted the cancellation, the outcome would likely have been different.
Regardless, the two significant takeaways from this should be:
- A force majeure clause will not protect a non-performing party in all instances, even if the reason for non-performance relates to some "Act of God," and
- Going forward, consider crafting a force majeure clause that addresses the problems associated with global pandemics.
The business attorneys at Lavelle Law are ready, willing and able to represent your business in these uncertain times. If you would like more information about this topic contact Brian Massimino at bmassimino@lavellelaw.com
or312-705-7555 for a free consultation.
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