Now, a Different Kind of Epidemic: Force Majeure Claims
Date: Monday, April 13, 2020
Source: Supply Chain Brian
The coronavirus pandemic has brought chaos to supplier-buyer relations the world round, resulting in widescale invoking of the contract-breaking clause known as force majeure.
Parties cite force majeure when an occurrence beyond their control prevents them from living up to their obligations under a contract. The event in question might be a war, riot, strike or natural disaster. That last broad category, usually involving incidents of extreme weather, often falls under the legal term “act of God.”
Not surprisingly, the coronavirus outbreak is triggering a raft of force majeure claims by suppliers, arising from broken supply lines, shuttered factories, and cancelled transport bookings. But don’t assume this pillar of English common law is at all clear, when it comes to applying it in the modern world.
Attorneys are being inundated with cases of force majeure, says Matt O’Hara, partner and co-chair of the Complex Litigation Practice Group with Freeborn & Peters LLP. Yet events of the past don’t necessarily provide strict guidance for dealing with the issue today.
O’Hara cites 9/11, the Great Recession of 2007-2008, and the oil-price shocks of the 1970s as earlier crises that set off a wave of force majeure claims. One might also consider previous outbreaks of disease, such as SARS in 2002-2003 and Ebola in 2014-2016, as events comparable to the coronavirus pandemic.
None of those incidents, however, is an exact match for what’s happening today. They have tended to be “either localized events, or rare crises that were pretty intermittent in nature,” O’Hara says. “What’s unprecedented is this global pandemic of crisis proportions.”
For all the disasters that have plagued supply chains in recent years — both figuratively and literally — many companies have given little thought to force majeure. Often it’s language tucked into a boilerplate clause within the contract, representing a distant and hazy scenario. “Businesses and lawyers are paying a lot more attention to clauses they anticipate they’ll be dealing with day to day,” says O’Hara.
On top of that, “there’s an enormous amount of business in trade and goods around the world without any written supply agreements at all.” How can parties to a non-contractual relationship expect to cope with a legal concept like force majeure, when they haven’t even nailed down in writing the basics of their arrangement?
Of course, a number of long-time industry standards and sets of laws such as the Uniform Commercial Codeoffer guidance in defining good business practices. But they don’t entirely make up for the absence of clear language about how a contract should be enforced in times of unforeseen crisis.
One might hope that the coronavirus pandemic would change all that. Yet there’s no single set of words that can address every kind of eventuality. Nor does the mere existence of force majeure language within a contract settle the matter when the dreaded crisis arises. Often there will be sharp disagreement over whether the event in question was truly beyond the control of the party who is attempting to invoke force majeure. Might that entity have taken better action in advance to mitigate the impact of the event, or to even sidestep it altogether? And just what is an “act of God,” anyway? Was the event actually set in motion by human action or inaction? In which case “God” might be off the hook, legally speaking.
As if that weren’t confusing enough, there are other legal doctrines that govern similar behavior under a contract, including “frustration of purpose” and “impossibility of performance.” O’Hara says those terms are “fairly synonymous, but probably not exactly so.” Like so much of written law, words and phrases that seemed clear at the time they were coined turn out to be anything but that.
O’Hara expects to see a significant amount of litigation arising in the coming months from the latest flurry of force majeure claims, some in response to direct impacts of the disease, and some related to the economic fallout that is sure to outlive it.
There’s hope for consensus. “You have a lot of strong commercial relationships between buyers and sellers of goods who have worked with each other closely over many years,” O’Hara says. “By keeping open the lines of communication, they can ultimately prevent a lot of disputes from getting too far down the road.”
And those boilerplate clauses that have been given short shrift by overworked corporate counsel in the past? Maybe less so in future. Notes O’Hara: “They’re probably getting a lot more attention now.”