The COVID-19 pandemic and its shadow continue to loom over businesses, supply chains, and more. The true scope of the challenges and changes imposed by COVID-19 continues to be learned as the economy and society adjust. But one immediate consequence is known: for the first time in a long time, businesses are having to seriously read and implement force majeure clauses to determine their respective rights and defenses for nonperformance of contractual obligations. Unfortunately, what businesses have all too frequently found is that their force majeure clauses are missing or incomplete, or that they are a hodgepodge of rote contract language that is poorly adapted to the needs of the transaction and the parties.
Moments like these offer the chance to rethink and reevaluate. And now is a good time for businesses, for the first time since the Great Recession, to reacquaint themselves with this oft-neglected part of the deal.
Oh, How the Tide Has Turned
“Do we need to waste time on that?” This question came a few years ago from a counterparty in response to our efforts to introduce a more comprehensively negotiated force majeure clause into a product supply agreement. The counterparty thought of the clause as a poor use of fees and resources. But, as COVID-19 continues to ripple through the economy, that clause is now doubtless weighed more than the attorney’s time spent drafting it.
Once an orphan at the bargaining table, force majeure is presently assuming a more central role. And its importance is being more fully appreciated, especially for transactions where performance over time depends on the ability of third parties and national and global markets to function smoothly. COVID-19 has quite literally put every interconnected and interdependent system to the test, and also tested the ability of contracts to anticipate and manage for the unknown. Since most, if not all, business is dependent to some extent on these systems, force majeure is no longer something that can be skipped in the so-called “boilerplate” of a contract. Its importance can only be expected to grow as the world becomes more tightly bound at every level, and thus the chances of systemic failure, outside the routine control of a business, increases.
Don’t Fall Back on the Courts to Fill in the Blanks
In Georgia, like other states, a contract’s force majeure clause will typically control whether the timely performance of a contractual obligation is excused, and if so, under what conditions and for how long. This point is important because, without a force majeure clause, state law is generally a limited source of guidance and relief. For example, under O.C.G.A. § 13-4-21, Georgia’s controlling law on the question, a court can only excuse contractual nonperformance that is a result of an “act of God.” Critically, O.C.G.A. § 1-3-3(3) excludes all human agency from the definition of an “act of God,” meaning that businesses are expected and required to perform all contractual obligations, except when unforeseeable events that are both natural and also irresistible or inevitable, like an earthquake, have rendered performance impossible. As one might imagine, this is a difficult standard, leaving parties to resort to other costly defenses in litigation if they do not have a force majeure clause in place that covers the type of contractual nonperformance that is the subject matter of the lawsuit. Working with your attorney on an effective force majeure clause is therefore an important source of risk control for the business.
Just Because a Bad Turn Was a Surprise Doesn’t Mean it’s Force Majeure
The touchpoint for an effective force majeure clause is whether the adverse events considered would be unforeseeable and outside of a party’s reasonable control. For example, if a product’s manufacture is critically dependent on a particular raw material that is suddenly and unexpectedly unavailable, the force majeure question would be whether the manufacturer could have reasonably employed a bit of foresight, time, and effort to secure an alternate source, either before or at the time of the supply interruption. If the raw material is more generally available and its lack was attributable to a business’ poor planning, force majeure is less likely available to excuse nonperformance. But, if the raw material is available from only one manufacturer or is critically dependent on a geopolitically unstable region for the bulk of its supply, then that might satisfy a force majeure condition. This question is often subtle and typically requires a good lawyer to help balance and negotiate.
Tips For a Well-Adapted Force Majeure Clause
It is not clear whether a pandemic or other serious and disruptive event that is in some sense or at least in part a product of human agency can satisfy the definition of an “act of God.” Different jurisdictions have different standards on what is in and out, although all share in common the notion of the unforeseeable, typically rooted in a natural cataclysm or event. This emphasis thus excludes other factors that parties may otherwise consider force majeure from consideration, like a collapse in credit markets or sudden and dramatic shortages in critical goods and services. The parties to a contract should therefore set aside a little time to think about what might happen if things go wrong over the lifetime of a contract, resulting in a force majeure clause that is tailored to the parties and the subject matter of their transaction.
Some factors that may help include:
- Macro factors — What are the major global categories that need to be included in the definition of a “force majeure event”? Acts of God, wars, and now pandemics are typically on the list. But parties should also consider the global and domestic environment in which they must operate and compete, which may add concerns like tariffs and sanctions in international trade to the mix of items that may constitute force majeure.
- Industry factors — What are the risks common to the industry in which the parties function? Some industries may have critical problems with a supply of suitably skilled or educated labor, while others may depend on a tenuous supply of parts and materials. How these are addressed and the mechanisms chosen for resolution if something goes wrong can be critical to whether the parties have a working contract and copacetic relationship that is adaptable to the unknown.
- Business factors — What are a business’ internal points of vulnerability? Parties should consider things like relative bargaining power with suppliers and customers, operating margins and cashflows, pre-existing agreements with third-parties that may be central to current performance, dependency on revolving credit facilities to fund operations, and other factors that may render timely compliance with a contract’s terms more challenging if something unexpectedly goes wrong. While these points are often subtle and may require work to appropriately balance and address, the parties should nevertheless give some thought to where critical elements of a business may derail for reasons outside of its control, which many learned during the Great Recession and now during the current pandemic.
- Market factors — What are the points of vulnerability for a given good or service once it reaches market, and where might marketing plans and budgets get shredded by factors known, and more importantly, unknown and unforeseeable? This consideration may not be appropriate for every force majeure clause. But, to the extent a product or service is (1) being launched into an emerging and untested market, (2) is a high-risk and innovative entrant into an already established market, or (3) is dependent on a market that is in severe flux and experiencing structural changes, force majeure may be helpful in controlling for some of the fallout that may arise from delayed performance for unforeseeable reasons outside of a party’s control.
- Legal factors — What are the regulatory and legal concerns that may derail contract performance? This complex area requires parties to think about whether contract performance is vulnerable to things like allegations of patent infringement or antitrust or Lanham Act violations, regulatory changes, and more. Working with an attorney experienced in the law pertinent to a given business or industry is typically helpful in pinpointing critical areas for force majeure to address.
Not all of these factors will apply in every situation. And, there may be factors not included in this list that the parties should discuss when building and negotiating a functional force majeure clause. Discussing these factors with your attorney is therefore essential.
Additional Considerations For Cyberattacks, Espionage, and Malefactors
Bad actors occupying digital spaces are increasingly wreaking havoc on the digital infrastructures of private and public entities. Some of these actors are lone wolves or may be embedded in larger criminal syndicates. But increasingly, they are tools and agents of foreign powers aimed at looting funds and intellectual property resources and disrupting the economic systems of the U.S. and its allies. As a result, many companies have encountered serious or even insurmountable challenges in fulfilling contractual obligations following an attack on their systems and infrastructure. Businesses should give thought as to how to address “third-party criminal activities,” “cyberattacks” and “digital sabotage,” and where the limits of reasonable planning and foresight may be considered satisfied before a party can avail itself of the excused performance provisions of a force majeure clause. Because there can be so much variability between industries on this question, and even between businesses within an industry, a “one size fits all” solution is unlikely to produce optimal results. Working with the right lawyer is therefore important.
Lessons Learned and to be Learned
If nothing else, businesses are now more inclined to scrutinize force majeure and other contractual provisions routinely regarded as “boilerplate.” Neglecting force majeure as a topic in contract negotiations puts parties at a serious disadvantage and may even court a “bet the company” moment. State laws, like those of Georgia, are often light on force majeure protections as many businesses are sadly discovering, which underscores the importance of being thorough and specific when drafting force majeure clauses.
Determining the applicability of force majeure in and out of the courtroom is a fact-intensive process. The general advice provided here requires a supplementary legal strategy to be planned and executed by skilled business counsel. Baker Jenner focuses on providing agile, deft, and efficient legal representation to businesses in Georgia and beyond. We look forward to discussing how we can elevate your company’s profile and safeguard its profits.
Baker Jenner LLLP
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