Read the fine print.
That’s the advice of Nicholas Duston, an attorney and partner at Norris McLaughlin P.A. in Bridgewater, New Jersey, to businesses considering invoking a force majeure clause in a contract.
Force majeure, or act-of-God events, could include war, fire, flood, lockdowns, slowdowns, shortage of energy supplies and natural disasters typically beyond the reasonable control of either party involved in a contract.
The term and its potential impact in contracts are being scrutinized due to business interruptions and shutdowns caused by coronavirus, or Covid-19. In Pennsylvania mandatory shutdowns ordered by Gov. Tom Wolf in March have rendered many everyday business practices illegal.
Social distancing requirements and recommendations from the Centers of Disease Control and Prevention, along with pandemic containment measures, make it difficult, if not illegal, for many businesses to continue operating as they normally would.
But Duston warns that force majeure contract clauses are, by design, “risky” to use and should be studied carefully before invoking them to get out of contractual obligations.
“Whether or not you are able, you are admitting you are going to breach your contract, and you have a good reason to do it,” he said.
He advises clients consider the relationships involved. Before making any decisions regarding force majeure call the person with whom the contract is made to see what kind of agreement can be reached.
“What are they experiencing? Is it a vendor, a franchisor or someone else. What issues are they facing? That phone call may be more productive than you think,” he said.
While a force majeure clause is common in many contracts triggering its use and successfully defending it in a court of law can be difficult.
Invoking force majeure is difficult. If a contract participant asks for the clause to be used to get out of a contracted obligation, and is found to be in the wrong, he or she remains legally bound and liable under the terms of the contract.
“A lot of contracts talk about who bears the delay and this often happens in construction with weather…if a contract says what happens in [specific] circumstances, then that is what is required,” Duston explained.
Two key components or doctrines of force majeure are “highly fact specific” and include “impracticability,” and “frustration of purpose.” Impracticability means the contracted purpose is unreasonably difficult to meet, such as trying to conduct business made illegal under the current circumstances. One example of impracticability is a gym or health club closed under Gov. Wolf’s shutdown order.
While a gym’s membership dues or payments are probably suspended during the mandatory shutdown, once the facility reopens members would likely remain bound to time on their original contracts, Duston said.
Frustration of purpose means the original intent or purpose of the contract, not the means to honor it, disappears.
He compared frustration of purpose to renting a New York City apartment for a single day to view the Macy’s Thanksgiving Day Parade. “If the parade is cancelled I can still rent the apartment, but the reason I rented it in the first place evaporated,” Duston said.
If a contract specifically addresses an event or circumstance, then impracticability or frustration of purpose won’t apply.
Workers hired for a specific task or under an employment contract with a time limit could fall under force majeure scrutiny, too, if the purpose or work required of them is now illegal.
One example is a contract between a cosmetic surgeon and hospital. The employer may determine whether or not the surgeon continues to be paid if no work can legally be performed because elective surgeries are illegal under the ban.
If force majeure is found to apply to a contract, then both sides are excused from their obligations.
Nearly all examples of impracticability and frustration of purpose would involve permanent changes moving forward.
“A lot of what is happening is temporary,” Duston said. “The governor’s order for us to stay at home will not remain permanent.”
That makes the excuse for non-performance temporary, too.