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A car is crushed by falling debris after an earthquake in Zagreb, Croatia, Sunday, March 22, 2020. A strong earthquake shook Croatia and its capital on Sunday, causing widespread damage and panic.
AP Photo/Darko Bandic
The term has more traditionally been applied to earthquakes and other natural disasters.
MAJOR LET-DOWN

Businesses all over the world are learning that “force majeure” is no get-out-of-jail-free card

Natasha Frost
By Natasha Frost

Reporter

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Force majeure. It sounds like an artistic technique—a foil to deus ex machina, for instance, or the technical name for the thrilling final movement of a great symphony. In fact, it’s an obscure legal term that does indeed denote something dramatic: “an event (as war, labor strike, or extreme weather) or effect that cannot be reasonably anticipated or controlled,” as defined by Merriam Webster’s legal dictionary.

Practically speaking, says attorney Jamie Lieberman, the founder of Hashtag Legal, “it is a clause that’s written into many contracts that allows a contract to be canceled or postponed due to impossibility performance.” A sample clause, according to the New York Law Journal, might look something like this:

The parties’ performance under this Agreement is subject to acts of God, war, government regulation, terrorism, disaster, civil disorder, curtailment of transportation facilities, or any other emergency beyond the parties’ control, making it impossible to perform their obligations under this Agreement. Either party may cancel this Agreement for any one or more of such reasons upon written notice to the other.

Sometimes referred to as an Act of God,” these clauses have often historically applied to natural disasters such as floods or earthquakes, though looser definitions have sometimes found merit with courts. In 2008, seeking to get out of a contract with Deutsche Bank, US president Donald Trump argued semi-successfully that the recession met the legal standard: “Would you consider the biggest depression we have had in this country since 1929 to be such an event? I would,” he told the New York Times at the time. “A depression is not within the control of the borrower.”

Now, with businesses facing some of their worst losses in years, many are wondering whether coronavirus might also fit the bill. Superficially, at least, it seems an obvious candidate—an unforeseen plague of almost biblical proportions, wreaking havoc and disrupting plans, hopes, and dreams alike. But, as many companies are learning, it isn’t always so simple as declaring “force majeure” and walking away from their legal obligations.

When can companies use “force majeure”?

There are many reasons companies might want to invoke force majeure, ranging from looking to renegotiate their delivery schedules to a desire to terminate the contract altogether, said Jennifer Tsai, a legal associate at Kira Systems, a company that uses AI to analyze contracts, in an online webinar. But it’s less straightforward than it looks, especially when it comes to coronavirus: “The party that’s seeking to invoke the force majeure clause has to show a causal link between the force majeure event and its failure to perform,” she said. “Not surprisingly, whether the coronavirus pandemic counts as a force majeure event under a given contract depends on the wording of a force majeure provision in that contract.”

This chart shows the volume of Google searches for “force majeure” per day, as indexed to a 100-point scale.

Often, a contract will explicitly state what constitutes an Act of God, helpfully putting any tricky theological questions to one side. When it does not, parties may have to rely on legal precedents for what has previously met the mark, or go to court to tussle it out. The bar is often set high: “Generally speaking, force majeure requires actual impossibility and not merely extreme difficulty,” notes a guide to these clauses put out by international law firm Cooley LLP. Legal impossibility, where an action or order from the government makes something illegal, may also meet the standard.

A case-by-case basis

Companies and other entities have long attempted to use force majeure to get out of legal contracts under difficult circumstances, sometimes to their peril. In 2015, the Moroccan government attempted to use the force majeure clause in its contract to postpone the African Nations Cup, due to the Ebola outbreak that eventually killed more than 11,000 people. But the Confederation of African Football (CAF) did not agree with its assessment, on the grounds that it would still be possible for the country to host the soccer tournament, if somewhat more difficult. Ultimately, Morocco was held liable by the CAF, banned from the next two African Nations Cups, and fined $1 million.

In France last week, multiple power suppliers attempted to invoke force majeure clauses to get out of contracts which allow them to buy nuclear power at a fixed price, after the crisis sent French electricity prices tumbling far beyond those prices. The country’s energy market regulator, CRE, rejected the request, on the grounds that the buyers had not demonstrated that the economic situation had made it impossible to fulfill their contractual obligations. Months earlier, China National Offshore Oil Corp. had attempted unsuccessfully to invoke a similar clause to allow it to get out of liquefied natural gas contracts with European energy companies.

 

Since the start of the year, many Chinese companies have lent heavily on the clause, with the China Council for the Promotion of International Trade issuing more than 5,600 force majeure event certificates to companies affected by the outbreak, according to a China Daily report. But whether the certificates will hold up outside of China remains to be seen, and depends a great deal on whether the companies actually had the relevant clauses in their contracts: In a statement,  Arnold and Porter, an international law firm, cautioned that under English law, force majeure was not implied in contracts, and had to be explicitly stated: “The circumstances in which a party may rely on force majeure, and the effect of such reliance, will be defined by that express provision.”

An AI-powered analysis by Kira suggested that around 70% of surveyed contracts, all of which included at least once Chinese entity, did have a force majeure clause. But only 14% of these explicitly included public health events such as the coronavirus crisis, possibly opening them up to scrutiny. Going forward, said Tsai, these clauses may be more routinely included.

Government says no

In some cases, government intervention has helped to settle these matters: After the Canadian government relaxed regulations that would ordinarily oblige airlines to issue a refund for cancelled flights, five Canadian airlines, including Air Canada, invoked unspecified force majeure clauses to issue passengers with credit vouchers for their cancelled flights. In a statement, airline Air Transat said it was within its rights: “In such a force majeure situation, way beyond our span of control, we do not have to issue a full refund for travels that have not been completed.” The airlines have since been sued by a passenger.

The US Department of Transportation has taken a far less liberal view in a seemingly identical situation. In an enforcement notice published April 3, the US Department of Transportation left little wriggle room for troubled US airlines to lean on force majeure clauses. “Passengers should be refunded promptly when their scheduled flights are cancelled or significantly delayed,” wrote Blane Workie, the department’s assistant general counsel for Aviation Enforcement and Proceedings. “The focus is not on whether the flight disruptions are within or outside the carrier’s control, but rather on the fact that the cancellation is through no fault of the passenger.” In other words, force majeure does not apply.

For consumers seeking refunds in these situations, it can be extremely difficult to bend companies’ arms, regardless of any government ruling. But that doesn’t mean it isn’t worth trying: United Airlines currently faces a class action suit for its failure to refund passengers.

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