In the midst of the COVID-19 pandemic, many organizations are experiencing critical interruptions to operations, which in turn has impacted their ability to meet contractual obligations. Due to their inability to perform, businesses are asking if they can avoid a contractual breach by invoking what is known as a “force majeure clause to excuse performance temporarily and even permanently.

Force Majeure Defined

Many commercial contracts contain a force majeure clause (a French term meaning “superior force”). Generally speaking, a force majeure clause excuses one or both parties’ performance obligations when situations arise that make performing the contractual duties impossible, impracticable or illegal due to unforeseen events outside of the party’s control. Force majeure clauses are typically written in contracts to include acts of God, severe acts of nature, war, terrorism and also epidemics.

Invoking the Force Majeure Clause

To make a force majeure claim, the contract in question must include a force majeure clause and timely notice must be given to the contractual party that the business intends to invoke it. The party who is unable to fulfill their contractual obligation must also demonstrate that present circumstances meet the definition of a force majeure event as defined in the contract terms.

In some cases, satisfying the requirements of the force majeure clause may require specific action for recognition as a force majeure event, such as a declaration of emergency by a governmental entity.

The party invoking force majeure must demonstrate that the “force majeure event” or its effects made it “impossible, impracticable, or illegal to perform their duties under the contract.” The inability to meet contractual obligations must be directly related to the force majeure event. The party must also demonstrate that ittook reasonable steps to mitigate the impact of the force majeure event.

In general, force majeure allows for a temporary reprieve of non-performance while the force majeure event (or its effects) persists. After the force majeure event is over, parties are expected to fulfill their contractual obligations as soon as is practicable.

Reading the Fine Print

Although many contracts contain a force majeure clause, the language in the clause may vary widely from contract to contract. A careful review of the contractual language is necessary to determine whether a business’s circumstances qualify as a force majeure event as defined in the contract. For example, some clauses may provide broad language to define force majeure events whereas other clauses may be narrower in definition and/or specifically exclude certain events.

What You Can Do

If disruptions to an organization’s business due to the pandemic have made it difficult to fulfill contractual obligations, it may be beneficial to review these contracts with a legal advisor to see if the contract includes a force majeure clause and whether the COVID-19 pandemic qualifies as a force majeure event under the language in the contract. If so, an organization may be entitled to temporary relief from fulfilling its contractual obligations.

Consult with a legal advisor to determine whether invoking force majeure is appropriate.

How GHJ Can Help

A party asserting a force majeure contractual defense must establish a causal link between the force majeure event and the party’s inability to perform. GHJ can assist with this by analyzing the underlying facts and determining the economic impact of the force majeure event to help support the claim that an organization was unable to perform.

Conversely, if a contractual partner has failed to perform and is raising a force majeure contractual defense that an organization does not believe is valid, GHJ can quantify the economic damages the business has sustained as a result of contracting party’s inability to perform its contractual obligations.

If you have any questions on the above, GHJ’s COVID-19 Response Team has an experienced team of consultants specializing in COVID-related laws and programs and can provide the tools your business needs to help it recover from this business disruption. We are here to assist organizations to succeed in these very challenging times.

Contacts:

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POST WRITTEN BY

Peter Brown

Peter Brown, CPA, CFF, ABV, leads GHJ’s Forensic Services Practice and has extensive experience quantifying damages in commercial litigation and conducting internal investigations. He has served as an expert witness in a variety of matters and as a third-party neutral regarding accounting matters…Learn More