By Laura Luo, Matthew Dickerson, Daniel He and Nicole Chin，King and wood Mallesons
A force majeure clause is a contractual risk allocation mechanism that essentially provides that if a contract party is prevented from performing its contractual obligations due to the occurrence of certain events beyond its control (known as force majeure events), then the nonperforming party is excused from its contractual obligations without being deemed to have breached the contract.
Although force majeure clauses are largely considered as “boilerplate” provisions in U.S. contracts, events such as the recent outbreak of the coronavirus, and its ongoing extremely disruptive effects in China and across the globe, are bringing the concept of force majeure into sharp focus.
Force Majeure Clauses in General
It is typical for sale and supply agreements to have a force majeure clause. Below is a sample force majeure clause in a U.S. law governed contract (the “Sample Clause”), broken down into four components: (1) the obligor (i.e. the party affected by the force majeure events) is excused from performance, (2) the definition of force majeure events, (3) the obligations of the affected party, and (4) the parties’ remedies.
- No party shall be liable or responsible to the other party, nor be deemed to have defaulted under or breached this Agreement, for any failure or delay in fulfilling or performing any term of this Agreement [(except for any obligations to make payments to the other party hereunder)],
- When and to the extent such failure or delay is caused by or results from the following force majeure events (“Force Majeure Events”): (a) acts of God; (b) flood, fire, earthquake or explosion; (c) war, invasion, hostilities (whether war is declared or not), terrorist threats or acts, riot or other civil unrest; (d) government order or law; (e) actions, embargoes or blockades in effect on or after the date of this Agreement; (f) action by any governmental authority; (g) national or regional emergency; [(h) strikes, labor stoppages or slowdowns or other industrial disturbances;] [and] [(i) shortage of adequate power or transportation facilities;] [and] [(j) other [similar] events beyond the [reasonable] control of the party impacted by the Force Majeure Event (the “Affected Party”)].
- The Affected Party shall give notice [within [NUMBER] days of the Force Majeure Event] to the other party, stating the period of time the occurrence is expected to continue. The Affected Party shall use diligent efforts to end the failure or delay and ensure the effects of such Force Majeure Event are minimized.
- The Affected Party shall resume the performance of its obligations as soon as reasonably practicable after the removal of the cause. In the event that the Affected Party’s failure or delay remains uncured for a period of [NUMBER] days following written notice given by it under this Section [X], [either party/the other party] may thereafter terminate this Agreement upon [NUMBER] days’ written notice.
Negotiating the Scope of Force Majeure Events
Force majeure events are generally extreme or unforeseen events beyond the control of the contract parties. There is no set definition of force majeure events and the scope of the force majeure events generally reflects the parties’ bargaining power and customary practice.
It is important to note that the party who stands to gain most from a detailed and extensive force majeure provision is the party bearing most of the principal non-payment obligations under the contract (i.e. the party most likely to become unable to perform due to a force majeure event). In the context of a sale and supply agreement, this party is typically the seller of the goods or the supplier of services. This party will typically try to negotiate a broadly drafted force majeure provision which includes a detailed list of events that would give rise to performance being excused, and limits the other party’s contractual remedies in the event that the force majeure provision is triggered. In sub-paragraph (j) of the Sample Clause, in addition to a list of specific force majeure events, there is “catch-all” language that expands force majeure events to include “other [similar] events beyond the [reasonable] control of the party impacted by the Force Majeure Event.” This catch-all language gives the affected party an opportunity to invoke force majeure when an event is not specifically listed, but nevertheless is beyond their control.
Likewise, the party who is the principal receiver of non-payment obligations will typically prefer the force majeure clause to be drafted narrowly, with a limited set of force majeure events and the ability to terminate the contract where the force majeure event continues for at least a certain period of time. Additionally, this party may even insist on some events being explicitly excluded from the definition of “force majeure event”, such as changes in economic circumstances, equipment failure, banking system failure, etc.
Force Majeure under NY law
Broadly speaking, U.S. contract law supports the principle of “freedom to contract”; the courts generally respect the parties’ intent as it has been documented in a signed writing. In New York, courts narrowly construe force majeure clauses. Where the parties’ agreement does not contain a force majeure clause, there is typically no basis for a force majeure defense. Therefore, absent a force majeure clause, a party will not be able to claim a force majeure defense against a breach of contract claim. Where a force majeure clause exists, one must first examine whether the event in question is explicitly listed as a force majeure event:
1.Where an event occurs which is explicitly listed in the force majeure clause
NY law provides that ordinarily a force majeure clause must include the specific event that is claimed to have prevented performance. NY courts have held that non-performance based on a force majeure clause is ordinarily excusable “only if the force majeure clause specifically includes that event that actually prevents a party’s performance.” Therefore, when a party is prevented from performing its contractual obligations due to an event explicitly included as a force majeure event under the applicable force majeure clause, the force majeure clause will govern the parties’ rights and obligations in such an event.
The party claiming a force majeure event excused its performance has the burden to establish force majeure applies. It also must demonstrate its efforts to perform its contractual duties despite the occurrence of the event.
However, having a category of event explicitly listed as a force majeure event is not an absolute guarantee that such an event would be upheld by the court as a force majeure event, if such an event becomes foreseeable during the course of the contract. There have been cases where, even though an event is specifically listed in the force majeure clause, the court rejected such event being a force majeure event because they court considered such event foreseeable. For example, in a US Supreme Court case ruling whether inclusion of the word “flood” in the force majeure clause would excuse a party who had failed to perform because of high waters, it argued that, in addition to being a listed event in the force majeure clause, the event also had to be unforeseeable. It ruled that otherwise, it could lead to absurd results. In Gulf Oil Corp. v FERC, the court stated that to use the force majeure clause “as an excuse to nonperformance, the event must have been beyond the party’s control and without its fault or negligence.” It further stated: “… it is possible to accurately describe an event at its initial occurrence as unforeseeable and later because of the regularity with which it occurs, to find that such a description is no longer applicable.” Thus, foreseeability may need to be analyzed by taking into account circumstances during the course of the contract duration. Further, using “fire” as an example, it stated: ““If fire is always an excuse, a contractor is free to use inflammable materials in a tinder-box factory and escape any damages for delay due to a resulting fire.” Accordingly, one must not solely rely on the language contained in the force majeure clause, even if the event is specifically listed. The court may look to outside factors, such as foreseeability, when determining whether a nonperforming party can avoid liability.
2.When an event occurs which is not listed in the force majeure clause
When an event that is not an explicit force majeure event occurs, if the applicable force majeure clause, such as the Sample Clause, has general catch-all language that expands the force majeure events to include “….and other like events…”, NY courts construe such general words narrowly and confine the interpretation of the “like events” to things of the same kind or nature as the force majeure events explicitly listed. In doing so, the courts may, again, inquire into the foreseeability of the event to make its determination. Some case examples:
- Rise in price for steel
In Rochester Gas and Electric Corporation v. Delta Sta, Inc., the force majeure clause did not specifically mention that an increase in price for the steel used to build eight transformers would discharge the steel supplier from liability in the event of a breach. The court further noted that financial difficulty growing out of a general business slowdown or recession may cause personal inability to perform but does not usually constitute an excuse by impossibility of performance.
- Mechanical malfunction
In Philbro Energy, Inc., the court noted that unanticipated mechanical breakdowns may constitute force majeure; however, if breakdowns occur with regular frequency, they are removed from the ambit of a force majeure clause.
- Dispute between the contracting parties
In Wuhan Airlines v. Air Alaska, Inc., Wuhan Airlines contracted to lease an aircraft from Air Alaska. The contract contained a force majeure clause that covered catastrophes such as a bomb, sabotage, or flood leading to destruction of the aircraft. A dispute between the parties prevented timely delivery of the aircraft. The court found that the said dispute did not fall within the force majeure provision, because it did not constitute a contingency specifically listed in, or similar to those listed in, the force majeure clause.
- Government Prohibition
In Reade v. Stoneybrook Realty, LLC, the force majeure clause in the commercial lease between the parties included “government prohibitions.” The court noted that interpretation of force majeure clauses is to be narrowly constructed and “only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused.” The court found that a court imposed a temporary restraining order that prevented the landlord from proceeding with construction necessary to delivery possession of premises to the tenant qualified as “government prohibition”.
Coronavirus as a Force Majeure Event?
When analyzing claims that assert the coronavirus outbreak as a force majeure event, in order to excuse contractual nonperformance, based on the discussion above, the following questions will need to be carefully considered:
1.Does the contract have a force majeure clause?
2.If a force majeure clause exists, does the clause explicitly include disease, epidemic, quarantines or words with similar meanings?
3.Does the clause explicitly refer to any of the following:
- government actions such as changes in law/regulations, orders, and embargoes, eminent domain;
- organized labor activities such as strikes; and/or
- shortage of power, supplies, infrastructure, or transportation,
4.Does the force majeure clause have a catch-all provision that includes, for instance, other similar events beyond the [reasonable] control of the party impacted by the force majeure events?
5.What has caused the nonperformance itself? Is it the virus itself (for example, workers have become infected and accordingly have become unable to perform) or government responses to the virus (for example, import/export restrictions on goods).
Coronavirus as an epidemic?
Perhaps as epidemics are not historically common occurrences, we have not found any NY case law dealing specifically with epidemics, quarantines or cases analyzing whether “disease” or “epidemic” can fall within another typically listed force majeure event. However, as discussed above, because NY courts have upheld force majeure claims based on explicit force majeure events, if a contract does explicitly include the terms “disease”,” epidemic” and/or “quarantine”, or words to that effect, as force majeure events, it can certainly be argued that the outbreak of coronavirus, which was declared by the World Health Organization as a Public Health Emergency of International Concern, is an epidemic and quarantine thus a force majeure event.
Coronavirus as other force majeure events?
If the force majeure clause does not specifically include these words, one may instead examine the byproducts of the coronavirus outbreak in terms of government actions in response to combat the outbreak, such as locking down cities, and generally restricting transportation and movement of people and goods. The phrase “governmental action” is a commonly listed force majeure event, and so the nonperforming party may seek to argue that its reason for nonperformance is as a result of this explicitly listed force majeure event. In Reade v. Stoneybrook Realty, LLC, the term “governmental prohibition,” as used in force majeure clause of a commercial lease that provided the landlord with additional time for performing in event its performance was affected by “governmental prohibition,” included temporary restraining order that prevented the landlord from proceeding with construction necessary to delivery possession of premises to the tenant.
In construing a force majeure clause, a court applies the rule of ejusdem generis by including, within the provision, only those things as the same character or class as the specific events mentioned. General words are not to be given an expansive meaning but should be confined to things of the same kind and nature as the particular matters mentioned. As discussed above, in Wuhan Airlines v. Air Alaska, Inc., the contract contained a force majeure clause that covered catastrophes such as a bomb, sabotage, or flood leading to destruction of the aircraft. Ultimately, a “dispute” caused the nonperformance and, as a result, did not fall within the force majeure provision, because it did not constitute a contingency specifically listed in, or similar to those listed in, the force majeure clause.
In determining whether force majeure has been properly invoked, a court may consider whether there is a practice in the industry to excuse performance on the basis of the claimed force majeure event that has such regularity of observance as to justify an expectation of its observance.
Alternatives to Force Majeure
In the event that force majeure is not available as a defense for nonperformance, NY law provides other defenses such as impracticability and frustration of purpose that a party may be able to utilize depending on the actual circumstances. For example, under the NY UCC in relation to sales of goods, impracticability defense allows a seller of goods to be excused from delayed delivery or non-delivery of goods if the seller’s performance has become “impracticable” because of either (i) the occurrence of unforeseen circumstances, or (ii) the seller’s compliance in good faith with an applicable governmental regulation or order. A performance is impracticable when it can only be done at an excessive and unreasonable cost. However, there is no precise point at which an increase in price of performance above the norm would be so disproportionate to the risk assumed as to amount to “impracticability” in a commercial sense.
Similarly, frustration of purpose defenses excuses a party’s performance if an unforeseeable event has occurred, the risk of such event has not been allocated by agreement or otherwise, and even though both parties can still perform the contract, such performance would not give the other party what induced him to make the bargain in the first place. In other words, the frustrated purpose must have been the basis of the agreement that without it, the transaction would have made little sense to both parties.
In summary, a force majeure clause is more likely to prevail with respect to the coronavirus where a force majeure clause is included in a commercial contract and specifically lists phrases such as “disease” “epidemic” or “quarantine”, and/or other categories of events that may cover the byproducts of coronavirus such as action by any governmental authority, national or regional emergency, labor stoppages or slowdowns or other industrial disturbances, shortage of adequate power or transportation facilities.
However, even including these phrases by no means guarantees that the force majeure clause will be upheld in court, particularly if the force majeure event was foreseeable (despite the language in the contract), and upholding the clause would defeat the underlying purpose of the force majeure provision. The clause is least likely to prevail when the contract is silent about the force majeure, although other defences may be available to excuse non-performance, depending on the type of contract.
Accordingly, in light of the coronavirus outbreak, business parties should keep in mind the following key takeaways:
- In NY, there is no automatic protection if a force majeure clause is not included in the contract. If you would like to be confident of the protection of a force majeure clause, one must be included in your commercial contracts.
- There is no universally recognized definition of “force majeure.” Accordingly, tailor your force majeure clauses to work best for your own business objectives; this will largely depend on the relevant sector(s) your business operates in, and whether your business is a consumer or supplier.
- If your agreement includes a force majeure provision, the party seeking its protection must follow the procedural requirements contained therein (such as following any notice provisions, or requirements to mitigate).
- There must be a causal link between the force majeure event and the failure to perform (i.e. the force majeure event must have caused the non-performance). The simple occurrence of a force majeure event is not a magic pill to avoid being bound by any and all unwanted contracts.
- Examine whether triggering the provisions of the force majeure clause may have unwanted side effects. Often, the counterparty will have a right to terminate the agreement. This may have knock-on effects which may not be initially foreseeable.
Explore whether other methods of avoiding contractual obligations may be available (such as termination for convenience), which may give your business a more desirable exit route.
 “General Contract Clauses: Force Majeure” by Practical Law Commercial Transactions
 Phibro Energy, Inc. v. Empresa De Polimeros De Sines Sarl, 720 F. Supp. 312, 318 (S.D.N.Y. 1989); see Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902-03, 524 N.Y.S.2d 384, 385, 519 N.E.2d 295, 296 (N.Y. 1987).
 Kel Kim Corp., 70 N.Y.2d at 902-03, 524 N.Y.S.2d 384, 519 N.E.2d 295.
 Phillips P.R. Core, Inc. v. Tradax Petrol. Ltd., 782 F.2d 314, 319 (2d Cir. 1985).
 United States v. Brooks–Callaway Co., 318 U.S. 120, 122–23, 63 S.Ct. 474, 475–76, 87 L.Ed. 653 (1943).
 Gulf Oil Corp. v. Federal Energy Regulatory Commission, 706 F.2d 444, 452 (3rd Cir.1983)
 Phibro Energy, Inc., 720 F. Supp. at 318. citing United States v. Brooks-Callaway Co., 318 U.S. 120, 122-23, 63 S.Ct. 474, 475-76, 87 L/Ed. 653 (1943)
 Kel Kim Corp., 70 N.Y.2d at 902-03, 524 N.Y.S.2d 384, 519 N.E.2d 295.
 See Rochester Gas and Elec. Corp. v. Delta Star, Inc., No. 06-CV-6155-CJS-MWP, 2009 WL 368508, at *8–10 (W.D.N.Y. 2009).
 Rochester Gas and Electric Corporation v. Delta Star, Inc. No. 06-CV-6155-CJS-MWP, 2009 WL 368508, at *6 (W.D.N.Y. 2009); see 14-74 Corbin on Contracts.
 Phibro Energy, Inc., 720 F. Supp. at 319.
 No. 97 Civ. 8924, 1998 WL 689957, at *3 (S.D.N.Y. Oct. 2, 1998).
 882 N.Y.S.2d 8, 9 (N.Y. App. Div. 2009).
 882 N.Y.S.2d 8, 9 (N.Y. App. Div. 2009).
 Team Mktg. USA Corp. v. Power Pact, LLC, 839 N.Y.S.2d 242 (N.Y. App. Div. 2007).
 Kel Kim Corp. v. Ctr. Mkts., Inc., 519 N.E.2d 295, 297 (N.Y. 1987).
 No. 97 Civ. 8924, 1998 WL 689957, at *3 (S.D.N.Y. Oct. 2, 1998).
 Mitsubishi Int’l. Corp. v. Interstate Chem. Corp., No. 08 Civ. 194, 2008 WL 2139137, at *3 (S.D.N.Y. May 20, 2008).
 Maple Farms, Inc. v. City Sch. Dist. of City of Elmira, 352 N.Y.S.2d 784, 788 (N.Y. Spec. Term 1974).
 Id. at 790.