The expression “may you live in interesting times” has, for centuries, been considered a curse. And we are now living in such “interesting times”, with the combination of the novel COVID-19 virus, the Russia/Ukraine war, and the recent monumental 600% increase in cybercrime (collectively, the “Trifecta”). This combination of events has wreaked havoc upon economies around the world, and has greatly contributed to the global supply chain disruptions we are facing today. These disruptions have led to, among many other things, material and equipment shortages, delays in or cancellation of projects, billions of dollars of lost profits, increased costs, and, of course, lawsuits.
In the United States, lawyers are grappling with how best to contractually position their clients to deal with these difficult circumstances. In so doing, greater emphasis is now rightly being placed upon the force majeure provision and what, if any, contractual relief can be obtained. The purpose of this article is to take a closer look at such provisions, paying particular attention to how these current “interesting times” shape the way we approach the following key elements of these provisions in the future: identification of excusable events, foreseeability, duty to mitigate and causal link.
A “force majeure” provision is a contractual means to provide a party certain relief for occurrences or events outside of a party’s control which have prevented, hindered, or delayed such party in performing its obligations under the contract. The purpose of a force majeure provision is to provide relief for a party in the event the status quo has been disrupted. A typical force majeure provision may look like the following:
Neither Company nor Contractor will be responsible, liable for, or deemed in breach of this Agreement because of any delay in the performance of their respective obligations under this Agreement due to the following circumstances and not otherwise caused by the fault or negligence of the Party: acts of God; unusually severe weather conditions; strikes or other labor difficulties; war; riots; terrorism; requirements, actions or failures to act on the part of governmental authorities; inability despite due diligence to obtain required permits or licenses; pandemic or epidemic; accident; fire; flood; damage to or breakdown of necessary facilities; or transportation delays or accidents (each a “Force Majeure Event”). A Party experiencing a Force Majeure Event shall exercise due diligence in endeavoring to overcome or minimize the Force Majeure Event’s impact on its performance, but settlement of any labor difficulties will be entirely within the discretion of the Party experiencing the labor difficulties. A Party that is affected by a Force Majeure Event shall give written notification to the other Party within five (5) days after the commencement of the Force Majeure Event.
Identification of Excusable Events
With any force majeure provision, the key initial analysis should be determining whether a specific event or circumstance qualifies as excusable force majeure. To assist in this analysis, drafters of force majeure provisions typically opt for one of two differing approaches: (i) specifically enumerate all eligible force majeure events, or (ii) establish an illustrative, but non-exhaustive, list of eligible events. Non-exhaustive lists are most frequently established by using common “catch-all” phrases such as “causes beyond the reasonable control of a party” or “including, without limitation to,”. Interpretation of force majeure provisions like the one above differs from state to state.
When an exhaustive list is established, courts tend to interpret the clause narrowly, looking closely at the specific events listed in (or omitted from) the provision. On the other hand, when the clause is drafted on an illustrative, non-exhaustive basis, courts are more likely to interpret the clause broadly to include unenumerated events if otherwise meeting the standard. Regardless of the approach taken, and to avoid confusion or misinterpretation as to intent, we recommend expressly identifying “pandemics”, “epidemics”, “acts of war, declared or not”, and “cybercrimes and cyberattacks” in force majeure provisions.
To complicate matters, many boilerplate force majeure provisions will specify what is not to be considered a force majeure event. Common exclusions include the inability to pay monies due and owing, equipment failure, acts, or omissions of a third party, and the unavailability of labor or materials. Consider this last bit, “unavailability of labor or materials.” Isn’t this precisely the circumstance so commonly faced right now due to the Trifecta? If your client is likely to face unavailability of labor or materials due to one, some or all the Trifecta, we recommend clarifying that such unavailability will be excusable if the cause of the unavailability is itself attributable to an otherwise excusable event of force majeure.
The Foreseeability Factor
Apart from determining whether a particular type of event is intended to be covered, many force majeure boilerplate provisions exclude events which are “foreseeable”. In such provisions, events will not be excusable as force majeure unless they are unforeseeable. Most would agree that, prior to 2020, a pandemic was unforeseeable. However, two years later, that analysis is changing. During the first year following the onset of the pandemic, courts were reasonably consistent in agreeing that the COVID-19 virus constituted a “natural disaster”. However, as COVID-19 continues to entrench itself in our world, COVID-19 case law may evolve to view it more ordinary than extraordinary. This is particularly true for contracts entered into after March 11, 2020 (the date the World Health Organization declared the COVID-19 outbreak a global pandemic), because such contracts have been entered with the full knowledge that a pandemic is ongoing. We have recently been advocating a compromise approach to this issue. In such approach, both parties acknowledge the existence of the pandemic, and agree that their contractual commitments were created with an understanding of the impacts of COVID-19, as such impacts existed as of the effective date of the contract. If, following the effective date, the impacts of COVID-19 materially change, the affected party should be entitled to seek relief under force majeure principles.
The same logic holds true for cybercrime. The proliferation of cybercrime is nothing short of astonishing. In a recent Deloitte poll, 98% of surveyed US executives reported that their organizations experienced at least one cyber event in the past year. As the sophistication of cybercriminals increases, we are bound to see more brazen attacks of the type inflicted upon Sony, Colonial Pipeline and so many others. Given this widespread and growing threat, should cybercrime be considered a foreseeable risk not worthy of force majeure protection? This question leads into another force majeure element: the duty to mitigate.
Duty to Mitigate
The sample clause above requires a party seeking force majeure relief to “… exercise due diligence in endeavoring to overcome or minimize the Force Majeure Event’s impact on its performance.”. In our practice, we have seen many variations on the level of this duty to mitigate. Such variations range from the more benign “exert reasonable efforts” duty to the more stringent “make every and utmost effort, including the expenditure of monies”. When a duty to mitigate drifts towards being unconditional and absolute, the cure may prove more costly than the disease. In order to lessen the risk of a denial of a force majeure claim on a “failure to mitigate” basis, we believe it is preferable to seek to establish a more objective standard of the duty to mitigate. To that end, we normally recommend defining the duty to mitigate as “exerting commercially reasonable efforts”.
Causal Link
In assessing a force majeure claim, courts are tasked with determining whether the defined event actually caused the delay or non-performance of the contract. In other words, there must also be a causal link between the event and the inability of the party to perform under the contract. In fact, the tendency to strictly interpret force majeure clauses often arises with the issue of causation. While “I tested positive for COVID” is now an easy excuse for avoiding the attendance of your second cousin’s first birthday party, that excuse will likely not discharge your obligations under a contract, unless you can successfully demonstrate a nexus between the virus and your non-performance.
Causal link is particularly relevant to that last member of the Trifecta, war. As mentioned above, acts of war are commonly identified in force majeure provisions. It is important to note, however, that war has been interpreted to require a lower causation threshold in comparison to other events. Most events specified in force majeure clauses require that such an event will need to “prevent performance” of the contractual obligations. In comparison, the condition of “war” typically requires only that the war “materially affects” performance, not requiring the prevention of performance in its entirety. A party claiming relief due to war should be prepared to demonstrate the causal link between the war and the party’s inability to perform under the contract (e.g., imposition of sanctions by the United States which hindered a party’s contractual obligations to make payments to a Russian vendor).
Conclusion
The impact on the construction industry of the Trifecta – COVID-19, the Russia/Ukraine war, and an immense jump in cybercrime – illustrates the need for a renewed urgency and emphasis on understanding and optimizing our clients’ risk allocation for the unknown and unexpected under force majeure principles. In so doing, it is imperative to ensure that (i) excusable events are properly identified and understood, (ii) implications of foreseeability have been duly considered as previously uncharted waters become charted, (iii) a measure of objectivity and reasonableness is applied to the duty to mitigate, and (iv) a causal link between the event and the impact is established.