By Julie M. Ryan
Negotiating and drafting contracts, during any year involves risk allocation. In 2022, businesses will likely place a high priority on this for prudent risk management. The past few years, businesses were at great risk of financial loss due to COVID-19 issues such as government-mandated shutdowns, increased spending on workplace safety measures, labor shortages, and supply chain issues.
Moving forward, businesses may exchange boilerplate force majeure provisions for ones responsive to those struggles. Force majeure clauses aim to protect against an unexpected event that causes a party’s performance to be impossible or impracticable. Drafting these clauses may include an analysis of (1) identification of events that will explicitly qualify as an unexpected event, (2) “catch-all” language to qualify non-specified events, (3) identification of events that will not excuse a failure to perform (e.g., increased cost or economic hardship), (4) notice requirements of any party wishing to invoke force majeure, (5) mitigation duties, and (6) the scope of relief upon a failure to perform due to force majeure.
Identification of Events. Nebraska appellate courts still have not decided whether the COVID-19 pandemic, or any business disruptions stemming from COVID-19, can count as a way for a contracting party to escape liability pursuant to a force majeure provision. In fact, there is limited Nebraska court precedent interpreting these provisions in any context. Nevertheless, consider identifying COVID-19 and any future strains or variants of COVID-19 or any other virus as qualifying force majeure events. Keep in mind any party claiming force majeure will need to prove a causal link between its failure of performance and the force majeure event. The required causation may range from being a high burden (e.g., “solely caused by”) to a lesser one (e.g., “proximately caused by”). Because the existence of a virus itself is often not the sole cause of issues, consider listing specific pandemic-related business disruptions as qualifying events.
Notice. Contracting parties often desire to establish long-term business relationships. The contract should state the rights and duties of each party once force majeure is claimed. A force majeure clause should require the affected party to give written notice to the other party within a specified period of time after the event causing delay or non-performance. Written notice should include an identification of the force majeure event and the extent to which the affected party’s duties are impacted (e.g., is partial performance still possible?). The notice should inform that the affected party will use commercially reasonable efforts to remove the cause or resume performance as soon as practicable. The contract could allow the other party the right to terminate the contract, without it being deemed a breach, if the non-performing party’s failure to perform lasts for an unacceptable duration of time. When there is a dispute over the merits of a force majeure claim, the party receiving the notice should send a written response rejecting the notice to reserve its rights.
Mitigation. In Nebraska, parties generally must mitigate damages. Failure to do so usually bars recovery of damages otherwise avoidable. A contract may include language to narrowly define or otherwise attempt to lessen the burden of the non-affected party’s mitigation duties in response to a claim of force majeure. On a related note, the contract could contain a cooperation clause by which the parties agree to jointly work to resolve contract disruptions relating to any pandemic-related or other listed force majeure event.
Scope of Relief. The force majeure provision should state whether the consequence of failure to perform results in termination of the contract excusing future performance by any party or temporary suspension of the contract.
This article is non-exhaustive of contract drafting matters. For more information, please call Julie at 402.392.1250