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Force Majeure: Boilerplate IS Really Important!

Updated: Apr 13

Force Majeure (§ 33)

Many practitioners fail to focus on the importance of "boilerplate clauses", believing these clauses will never come into play or impact the parties' performance. The recent COVID-19 pandemic, however, now has many of these same practitioners carefully examining the wording of their force majeure clauses to determine if the pandemic excuses performance under their contracts . Some, to their surprise, will find that force majeure clauses in their agreements do not excuse performance as a result of the COVID-19 pandemic.


Force majeure (“superior force” in French) clauses are intended to excuse a party’s performance in the event the party’s ability to perform is thwarted by unforeseen events outside of its control, such as an act of God. Although there is no generally agreed definition of force majeure, Black’s Law Dictionary defines “force majeure” as “An event or effect that can be neither anticipated nor controlled.” BLACKS LAW DICTIONARY (9th ed.). Force majeure is not limited, however, to the equivalent of an act of God. Pacific Vegetable Oil Corp. v. C. S. T., Ltd., 29 Cal. 2d 228 (1946).

To determine the existence of an event of force majeure, a court will examine whether an insuperable interference occurred without the party’s intervention that could not have been avoided by the exercise of prudence, diligence, and care. Events that are reasonably foreseeable do not constitute an event of force majeure and do not excuse performance. See URI Cogeneration Partners, L.P. v. Board of Governors for Higher Educ., 915 F. Supp. 1267 (D. RI. 1996); Watson Labs., Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099 (C.D. Cal. 2001). Further, under law of many jurisdictions, an “act of god” only excuses a party’s performance to the extent the underlying agreement contains a force majeure clause. See e.g., GTPMC, Inc. v. Texas City Ref., Inc., 822 S.W.2d 252. 259 (Tex. App. 1990).


Force majeure clauses are narrowly construed. Kel Kim Corp. v. Central Markets, Inc., 519 N.E. 2d, 295 (N.Y. 1987). To invoke the protections of a force majeure clause, the event must be beyond a party’s control and not due to its own fault or negligence. Gulf Oil Corp. v. Federal Energy Regulatory Commission, 706 F.2d 444 (3d Cir. 1983), cert. denied 464 U.S. 1038 (1984). Because of these limitations, companies carry business interruption insurance even though their injuries may arise from an act of God such as a flood.


In most cases, such clauses excuse only the licensor’s performance, as usually the licensee’s only affirmative obligation is to pay the license fee. Nonetheless, the licensee should insist on making any such clause mutual.


2. Drafting a Force Majeure Clause


Both parties should pay careful attention to a contract’s force majeure clause and tailor it to the goals of the contemplated transaction while excluding foreseeable risks that can be managed.


The licensee should give careful consideration to the wording of any clause as an overly broad force majeure clause could undercut any service level agreements or performance obligations of the licensor. At the same time, the licensor should seek to ensure that the clause is not so narrowly drawn as to restrict the licensor’s ability to excuse performance for conditions beyond its control.


Drafters usually take one of two approaches in defining an event of force majeure:


(i) Listing those events whose occurrence are deemed to constitute an event of force majeure (See, e.g., Hearst Commc’ns, Inc. v. Seattle Times Co, 154 Wn.2d 493, 498 (2005) (force majeure clause provided neither party would be liable to the other for any failing from force majeure events such as war or labor strikes); or


(ii) Utilizing very broad language stating any act outside the control of the parties is deemed to be an event of force majeure (See, e.g., TransAlta Centralia Generation LLC v. Sicklesteel Cranes, Inc., 134 Wn. App. 819, 823 (2006) (defining force majeure as an event that (i) was not within either party’s control, and (ii) which could not have been prevented through due diligence).

Each of these approached has it benefits and drawbacks. With the first, many elements of the list of events may or may not be relevant to a particular transaction. Further, if an event is not listed, does that mean it does not constitute an event of force majeure? This is important; given this provision is intended to protect against unforeseen event, how can the parties possibly predict all possible events? For example, very few parties foresaw the COVID-19 pandemic, but it is a safe bet that almost all force majeure clauses will include “pandemic” going forward.


If the parties adopt the second approach using broadly drafted language, many events that are not truly events of force majeure may fall qualify under the language of the agreement. A lack of specificity results in ambiguity which may lead to a dispute. For example, is an economic downturn or a recession an event of force majeure? Is a significant increase in inflation causing the vendor’s labor costs to increase beyond what the vendor forecasted an event of force majeure?


Each party should carefully review any list of events to ensure that each event is truly an event of force majeure and is not simply an effort to expand a party’s ability to limit its risk and avoid performance. Some courts will only excuse performance to the extent an event is set forth in an agreement’s force majeure clause. Kel Kim Corp. v. Central Markets, Inc., 519 N.E. 2d, 295, 296 (N.Y. 1987). A more prudent approach is to utilize a combination of approaches to illustrate events the parties believe to be acts of God.

Each party shall be excused from performing any of its obligations hereunder, in whole or in part, as a result of delays caused by the other party or a Third Party or by an act of God, war, riot, civil commotion, explosion, fire, government action, court order, epidemic or other circumstance beyond its reasonable control, but specifically excluding labor and union-related activities and the non-performance of any Vendor subcontractor, regardless of cause. If any of the above-enumerated circumstances prevent, hinder or delay performance of either party's obligations hereunder for more than thirty (30) calendar days, the party not prevented from performing shall have the right to terminate this Agreement without liability or penalty as of the date specified by such party in a written notice of termination to the other party.

The parties should always exclude monetary obligations from a force majeure event to avoid having a party claim it cannot perform (pay monies due) due to an economic downturn and thereby be excused from making payment. See e.g., Marionneaux v. Smith, 163 So. 206 (La. 1935) (unforeseen economic depression is not an event of force majeure).


3. Impact on Performance


Generally, a party’s performance is excused only from those obligations impacted by an event of force majeure. Idaho Power Co. v. Cogeneration, Inc., 9 P.3d 1204 (Idaho 2000). An event of force majeure does not terminate an agreement but rather excuses a party’s performance during the period the event of force majeure is in existence. Commonwealth Edison Co. v. Allied-Gen Nuclear Servs., 731 F. Supp. 850 (N.D. Ill. 1990). A party seeking to invoke the protection of a force majeure clause can do so only after using its skill, diligence and good faith to perform. Oosten v. Hay Haulers Dairy Employees and Helpers Union, 291 P.2d 17, 20–21 (Cal. 1955); Corbin On Contracts § 1342. Both parties should insist on having the right of termination if the event of force majeure continues for a set period of time. While this right to terminate may be a hollow right, if every vendor is affected by same the event of force majeure, it could be a significant benefit to the licensee if a third party could deliver the contracted for software or services. From the licensor’s perspective, the licensor does not want to keep a project fully staffed while it waits for the event of force majeure to abate. If the licensor is unable to terminate its performance after a set period, it may have to staff a project for which it will not be compensated. The parties should also address whether an event of force majeure that continues for a set period of time triggers the release any source code escrow. Additionally, the licensee should include an exclusion of the licensor’s disaster recovery obligations from the force majeure provision.


For example, many licensees are hesitant to include labor strife or strikes within the list of events constituting an event of force majeure as theoretically they are within the control of the respective employer. Further, the nonperformance of the licensor’s subcontractors should also not be considered an event of force majeure. Thus, a prudent licensee should specifically state that the failure of a licensor’s subcontractors to perform shall not excuse the licensor’s performance. One way to address this issue is to draft the agreement’s force majeure clause in such a way that it addresses the different obligations of the licensor. Thus, a licensor may be excused from performing one aspect of a contract but not another upon the occurrence of the same event.


The parties should definitively state that a change in the economic conditions underlying a contract’s performance does not constitute an event of force majeure. While this position is clearly supported in the case law, it does not hurt to include an affirmative statement to this effect in the contract. U.S. v. Panhandle Eastern Corp., 693 F. Supp. 88, 98 (D. Del. 1988) (“economic hardship due to market fluctuations in the natural gas industry did not constitute a force majeure event.”); Chainworks, Inc. v. Webco Indus., Inc., 2006 WL 1521946 (W.D. Mich. May 31, 2006). To the extent possible, the force majeure clause should address the impact of presidential decrees, sanctions, tariffs and governmental laws and regulations. See Kyocera v. Hemlock Semiconductor, LLC., 886 N.W.2d 445 (Mich. 2015)(denying plaintiff’s motion to claim Chinese government involvement in solar panel market which depressed prices an event of force majeure).


4. Notification


A comprehensive force majeure provision should detail the requirements of the notice provision including;


· how quickly notice must be given after the event occurred

· what information must be included in the notice such as:

· how long the event of force majeure is expected to last,

· what actions the affected party is taking to mitigate the damages; and

· how long must the event be before the other party may terminate the agreement. Model language from the perspective of the party affected by the other’s delay follows:

If any such event of force majeure occurs and such event continues for thirty (30) days or more, the party delayed or unable to perform shall give immediate notice to the other party, and the party affected by the other’s delay or inability to perform may elect at its sole discretion to:

(a) terminate this Agreement upon mutual agreement of the parties;

(b) suspend such SOW for the duration of the condition and obtain elsewhere Software or Services comparable to the Software or Services to have been obtained under this Agreement; or

(c) resume performance of such SOW once the condition ceases with the option of the affected party to extend the period of this Agreement up to the length of time the condition endured.

Unless written notice is given within thirty (30) days after the affected party is notified of the condition, option (c) shall be deemed selected.

5. Other Applicable Theories


To the extent a licensor claims it is excused from performance by an event of force majeure, a customer who has paid for undelivered services may be entitled to recover any monies paid to the licensor under the theory of quantum meruit. See Facto v. Pantagis, 915 A.2d 59 (N.J. Super 2007) (plaintiff entitled to recover monies paid for event cancelled by force majeure).


In addition to force majeure, commercial impracticality may apply. Commercial impracticality is a concept arising under the UCC and the Restatement (Second) of Contracts closely related to the doctrine of force majeure that applies in the event a party’s performance is thwarted by events outside its control that was not anticipated by the parties. See UCC § 2-615; Restatement (Second) Contracts § 261. For a more detailed discussion including the doctrine of commercial impracticality, see Commercial Impracticality as an Excuse for Contract Performance, 38 The Law. Brief 1 (Sept. 15, 2008); Classen, Judicial Intervention in Contractual Relationships Under the Uniform Commercial Code and Common Law, 42 S.C. L. Rev. 379 (1991).

PRACTICE POINT:

In drafting a comprehensive force majeure provision, the parties should consider and address the following issues:

· Is force majeure limited to a list of identified events or a more conceptual approach such a “acts of God”?

· Is the definitional approach to defining force majeure consistent with the nature of the transaction?

· Are economic issues considered force majeure events?

· What are the parties’ obligations upon the occurrence of an event of force majeure?

· What is the period of time for providing the other party notice of the event of force majeure?

· What happens if the party fails to provide notice?

· What must be included in any notice of force majeure?

o A description of the force majeure?

o The expected length of the condition?

o How the impacted party is seeking to mitigate the impact?

· What if a party disputes that an event of force majeure occurred?

· What is the obligation of the party claiming an event of force majeure to mitigate the impact?

· Who can terminate the agreement in the event of force majeure?

· After what period may they terminate the agreement?

· Will the impacted party be partially or fully excused from performance?

· Does the force majeure language exclude events arising from the parties’ actions or inactions?

For a more detailed discussion of the doctrine of force majeure, see Tanenbaum, Force Majeure is Not Just Boilerplate Anymore: Why Combining Force Majeure with Disaster Recovery Provisions Makes Sense, 18 Intell. Prop. & Tech. L.J. 17 (Oct. 2006); Klein & Glazer, The Lowly Force Majeure: Why It Shouldn’t Be Neglected, Start-Up & Emerging Companies 5 (Nov. 2000).1. Overview1. Overview

Force majeure (“superior force” in French) clauses are intended to excuse a party’s performance in the event the party’s ability to perform is thwarted by unforeseen events outside of its control, such as an act of God. The concept of force majeure arises under contract, not under common law although the Section 1511 of the California Civil Code does recognize the concept of force majeure although not by name. (a performance obligation is excused “when it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.”). Thus, in most cases, a party seeking to excuse its performance may only invoke the doctrine of force majeure if the parties’ agreement contains a force majeure clause.

Although there is no generally agreed definition of force majeure, Black’s Law Dictionary defines “force majeure” as “An event or effect that can be neither anticipated nor controlled.” BLACKS LAW DICTIONARY (9th ed.). Force majeure is not limited, however, to the equivalent of an act of God. Pacific Vegetable Oil Corp. v. C. S. T., Ltd., 29 Cal. 2d 228 (1946).

To determine whether an event constitutes an event of force majeure, a court will examine whether an insuperable interference occurred without the party’s intervention that could not have been avoided by the exercise of prudence, diligence, and care. Events that are reasonably foreseeable do not constitute an event of force majeure and do not excuse performance. See URI Cogeneration Partners, L.P. v. Board of Governors for Higher Educ., 915 F. Supp. 1267 (D. RI. 1996); Watson Labs., Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099 (C.D. Cal. 2001). Further, under law of many jurisdictions, an “act of god” only excuses a party’s performance to the extent the underlying agreement contains a force majeure clause. See e.g., GTPMC, Inc. v. Texas City Ref., Inc., 822 S.W.2d 252. 259 (Tex. App. 1990).


Force majeure clauses are narrowly construed. Kel Kim Corp. v. Central Markets, Inc., 519 N.E. 2d, 295 (N.Y. 1987). To invoke the protections of a force majeure clause, the event must be beyond a party’s control and not due to its own fault or negligence. Gulf Oil Corp. v. Federal Energy Regulatory Commission, 706 F.2d 444 (3d Cir. 1983), cert. denied 464 U.S. 1038 (1984). Because of these limitations, companies carry business interruption insurance even though their injuries may arise from an act of God such as a flood.


The customer should carefully consider the wording of any clause as an overly broad force majeure clause could undercut any service level agreements or performance obligations of the vendor. At the same time, the vendor should seek to ensure that the clause is not so narrowly drawn as to restrict the vendor’s ability to excuse performance for conditions beyond its control.

Practically speaking, force majeure clauses excuse only the vendor’s performance, as usually the customer’s only affirmative obligation is to pay the vendor. Nonetheless, the customer should insist on making any force majeure clause mutual.

2. Defining Force Majeure

Drafters usually take one of two approaches in defining an event of force majeure:


(y) Listing those events whose occurrence are deemed to constitute an event of force majeure (See, e.g., Hearst Commc’ns, Inc. v. Seattle Times Co, 115 P.3d 362 (2005) (force majeure clause provided neither party would be liable to the other for any failing arising from force majeure events such as war or labor strikes); or


(z) Utilizing very broad language stating any act outside the control of the parties is deemed to be an event of force majeure (See, e.g., TransAlta Centralia Generation LLC v. Sicklesteel Cranes, Inc., 142 P.3d 209 (2006) (defining force majeure as an event that (i) was not within either party’s control, and (ii) which could not have been prevented through due diligence).


Each of these approached has it benefits and drawbacks. With the first, many elements of the list of events may or may not be relevant to a particular transaction. Further, if an event is not listed, does that mean it does not constitute an event of force majeure? This is important; given this provision is intended to protect against unforeseen event, how can the parties possibly predict all possible events? For example, very few parties foresaw the COVID-19 pandemic, but it is a safe bet that almost all force majeure clauses will include “pandemic” going forward.


If the parties adopt the second approach using broadly drafted language, many events that are not truly events of force majeure may fall qualify under the language of the agreement. A lack of specificity results in ambiguity which may lead to a dispute. For example, is an economic downturn or a recession an event of force majeure? Is a significant increase in inflation causing the vendor’s labor costs to increase beyond what the vendor forecasted an event of force majeure?


Many customers are hesitant to include labor strife or strikes within the list of events constituting an event of force majeure as theoretically they are within the control of the respective employer. Further, the nonperformance of the vendor’s subcontractors should also not be considered an event of force majeure. Thus, a prudent customer should specifically state that the failure of a vendor’s subcontractors to perform shall not excuse the vendor’s performance. One way to address this issue is to draft the agreement’s force majeure clause in such a way that it addresses the different obligations of the vendor. Thus, a vendor may be excused from performing one aspect of a contract but not another upon the occurrence of the same event.


The agreement should address whether presidential decrees, sanctions, tariffs and other unforeseen changes in laws and regulations will constitute an event of force majeure. See Kyocera v. Hemlock Semiconductor, LLC., 886 N.W.2d 445 (Mich. 2015)(denying plaintiff’s motion to claim Chinese government involvement in solar panel market which depressed prices an event of force majeure).


Each party should carefully review any list of events to ensure that each event is truly an event of force majeure and is not simply an effort to expand a party’s ability to limit its risk and avoid performance. Some courts will only excuse performance to the extent an event is set forth in an agreement’s force majeure clause. Kel Kim Corp. v. Central Markets, Inc., 519 N.E. 2d, 295, 296 (N.Y. 1987). A more prudent approach is to utilize a combination of approaches to illustrate events the parties believe to be acts of God.

Each party shall be excused from performing any of its obligations hereunder, in whole or in part, as a result of delays caused by the other party or a Third Party or by an act of God, war, riot, civil commotion, explosion, fire, government action, court order, epidemic or other circumstance beyond its reasonable control, but specifically excluding labor and union-related activities and the non-performance of any Vendor subcontractor, regardless of cause. If any of the above-enumerated circumstances prevent, hinder or delay performance of either party's obligations hereunder for more than thirty (30) calendar days, the party not prevented from performing shall have the right to terminate this Agreement without liability or penalty as of the date specified by such party in a written notice of termination to the other party.

3. Notification

A comprehensive force majeure provision should detail the requirements of the notice provision including;

· how quickly notice must be given after the event occurred

· what information must be included in the notice, e.g.:

o a description of the event of force majeure,

o a description of how the force majeure impacted the notifying party,

o how long the event of force majeure is expected to last,

o what actions the notifying party is taking to mitigate the delay; and

o when the event of force majeure is expected to end

Model language from the perspective of the party affected by the other’s delay:

If any such event of force majeure occurs and such event continues for thirty (30) days or more, the party delayed or unable to perform shall give immediate notice to the other party, and the party affected by the other’s delay or inability to perform may elect at its sole discretion to:

(a) terminate this Agreement upon mutual agreement of the parties;

(b) suspend such SOW for the duration of the condition and obtain or sell elsewhere Software or Services comparable to the Software or Services to have been obtained under this Agreement; or

(c) resume performance of such SOW once the condition ceases with the option of the affected party to extend the period of this Agreement up to the length of time the condition endured.

Unless written notice is given within thirty (30) days after the affected party is notified of the condition, option (c) shall be deemed selected.

4. Additional Terms

While defining what “force majeure” is important, it is equally important that the agreement’s force majeure clause be sufficiently detailed to avoid ambiguity and a potential dispute:


· Will a claim of force majeure be time-barred if the claim is not made in a timely manner?

· What actions must the party claiming an event of force majeure take to mitigate the impact of the event of force majeure?

· Must the party claiming an event of force majeure continue to perform those obligations that were not effected?

· If a party claims an event of force majeure, is the counter-party’s performance excused as well?

· How long must the event of force majeure continue before a party may terminate the agreement?

· Which party may terminate the agreement?

· What happens if the parties do not agree that an event of force majeure arose?

· What terms of the agreement apply if an event of force majeure arises?

o Governing law?

o Dispute resolution?

o Injunctive relief?

5. Impact on Performance

Generally, a party’s performance is excused only from those obligations impacted by an event of force majeure. Idaho Power Co. v. Cogeneration, Inc., 9 P.3d 1204 (Idaho 2000). An event of force majeure does not terminate an agreement but rather excuses a party’s performance during the period the event of force majeure is in existence. Commonwealth Edison Co. v. Allied-Gen Nuclear Servs., 731 F. Supp. 850 (N.D. Ill. 1990). A party seeking to invoke the protection of a force majeure clause can do so only after using its skill, diligence and good faith to perform. Oosten v. Hay Haulers Dairy Employees and Helpers Union, 291 P.2d 17, 20–21 (Cal. 1955); Corbin On Contracts § 1342. Both parties should insist on having the right of termination if the event of force majeure continues for a set period of time.


While this right to terminate may be a hollow right, if every vendor is affected by same the event of force majeure, it could be a significant benefit to the customer if a third party could deliver the contracted for software or services. From the vendor’s perspective, the vendor does not want to keep a project fully staffed while it waits for the event of force majeure to abate. If the vendor is unable to terminate its performance after a set period, it may have to staff a project for which it will not be compensated. The parties should also address whether an event of force majeure that continues for a set period of time triggers the release any source code escrow. Additionally, the customer should include an exclusion of the vendor’s disaster recovery obligations from the force majeure provision.


The parties should definitively state that a change in the economic conditions underlying a contract’s performance, or the economy itself does not constitute an event of force majeure. While this position is clearly supported in the case law, it does not hurt to include an affirmative statement to this effect in the contract. U.S. v. Panhandle Eastern Corp., 693 F. Supp. 88, 98 (D. Del. 1988) (“economic hardship due to market fluctuations in the natural gas industry did not constitute a force majeure event.”); Chainworks, Inc. v. Webco Indus., Inc., 2006 WL 1521946 (W.D. Mich. May 31, 2006); Marionneaux v. Smith, 163 So. 206 (La. 1935) (unforeseen economic depression is not an event of force majeure).

6. Other Potentially Applicable Theories

To the extent a vendor claims it is excused from performance by an event of force majeure, a customer who has paid for undelivered services may be entitled to recover any monies paid to the vendor under the theory of quantum meruit. See Facto v. Pantagis, 915 A.2d 59 (N.J. Super 2007) (plaintiff entitled to recover monies paid for event cancelled by force majeure).


Commercial impracticality may also be applicable. Commercial impracticality is a concept arising under the UCC and the Restatement (Second) of Contracts closely related to the doctrine of force majeure that applies in the event a party’s performance is thwarted by events outside its control that was not anticipated by the parties. See UCC § 2-615; Restatement (Second) Contracts § 261. For a more detailed discussion including the doctrine of commercial impracticality, see Commercial Impracticality as an Excuse for Contract Performance, 38 The Law. Brief 1 (Sept. 15, 2008); Classen, Judicial Intervention in Contractual Relationships Under the Uniform Commercial Code and Common Law, 42 S.C. L. Rev. 379 (1991).


Commercial frustration is another doctrine that may be applicable. Commercial frustration arises when, after a contract is executed, a party’s purpose for entering the agreement is frustrated without its fault by an event the nonoccurrence of which was a basic assumption on which the contract was founded. In such event, the party’s performance is excused. Restatement (Second) Contracts § 261 See, Howard v. Nicholson, 556 S.W.2d 477 (Mo. Ct. App.1977).

PRACTICE POINT:

In drafting a comprehensive force majeure provision, the parties should consider and address the following:

· Is force majeure limited to a list of identified events or a more conceptual approach such a “acts of God”?

· Is the definitional approach to defining force majeure consistent with the nature of the transaction?

· Are economic issues considered force majeure events?

· What are the parties’ obligations upon the occurrence of an event of force majeure?

· What is the time period for providing the other party notice of the event of force majeure?

· What happens if the party fails to provide notice?

· What must be included in any notice of force majeure?

o A description of the force majeure?

o The expected length of the condition?

o How the impacted party is seeking to mitigate the impact?

· What if a party disputes that an event of force majeure occurred?

· What is the obligation of the party claiming an event of force majeure to mitigate the impact?

· Who can terminate the agreement in the event of force majeure?

· After what period may they terminate the agreement?

· Will the impacted party be partially or fully excused from performance?

· Does the force majeure language exclude events arising from the parties’ actions or inactions?

For a more detailed discussion of the doctrine of force majeure, see Tanenbaum, Force Majeure is Not Just Boilerplate Anymore: Why Combining Force Majeure with Disaster Recovery Provisions Makes Sense, 18 Intell. Prop. & Tech. L.J. 17 (Oct. 2006); Klein & Glazer, The Lowly Force Majeure: Why It Shouldn’t Be Neglected, Start-Up & Emerging Companies 5 (Nov. 2000).

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