Russia-Ukraine Crisis Brings Force Majeure As the impact of the Ukraine-Russia crisis continues to spread, businesses may again need to revisit their contracts to determine how force majeure clauses may impact their contractual rights and obligations...
Many businesses received a crash course in force majeure clauses during the COVID-19 pandemic. As the impact of the Ukraine-Russia crisis continues to spread, businesses may again need to revisit their contracts to determine how force majeure clauses may impact their contractual rights and obligations.
Force Majeure Clauses
The term “force majeure” means “superior force” in French. In the context of a legal contract, it may relieve the parties from performing their duties under the contract in certain circumstances. These circumstances typically include those deemed beyond the parties’ control and make performance of the contract inadvisable, commercially impracticable, illegal, or impossible. Examples of some of these types of circumstances often include natural disasters or “acts of God” (hurricanes, floods, earthquakes, and other similar events) as well as manmade disasters (war, terrorism, civil disorder, supply shortages, and labor strikes).
While force majeure clauses are often considered “boilerplate,” the provisions can differ widely between contracts. Some standard provisions are worded very narrowly and, thus, may only apply in certain very limited circumstances. For example, some force majeure clauses may only excuse performance when it is impossible, rather than impractical (untimely, expensive, etc.). Other provisions will only list certain circumstances that excuse performance, rather than including a catchall such as “other unforeseeable events beyond the control of the parties.”
Russian Invasion of Ukraine Impacting Contractual Obligations
Businesses that may be impacted by the ongoing Russia-Ukraine crisis should quickly assess their contractual obligations. One of the first steps should be to evaluate whether you or the other parties to the contract may rely upon the force majeure clause and to what extent. As a result of the clause being deemed by many as “boilerplate,” many force majeure clauses may not specifically address the situation. Thus it is imperative that businesses understand what particular obligations can be abdicated and which remain in full force. The terms of the contract may also identify specific notice requirements, as well as the timeline for providing such notification. Notably, the party seeking to rely on the force majeure clause typically has the burden of establishing the fact that a covered force majeure event occurred and that the party complied with all notice requirements.
Businesses should also carefully review agreements to determine if either party is subject to mitigation or allocation requirements. For example, agreements often require the party relying on the occurrence of a force majeure event to use its “best efforts” and/or act “in good faith” to resume normal operations after the force majeure event has passed.
In the absence of an applicable force majeure provision, businesses may also rely on contract law principles, such as frustration of purpose and/or impossibility of performance. Frustration of purpose may apply when performance of a contract becomes worthless to a contracting party, through no fault of its own. New Jersey and New York both follow the (Second) Restatement of Contracts, which describes three elements that must exist in such an instance: (1) “the purpose that is frustrated must have been a principal purpose of that party in making the contract”; (2) “the frustration must be substantial”; and (3) “the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made.”
As the name implies, impossibility—or impracticability— of performance applies when the actual performance of the contract is impossible. The (Second) Restatement of Contracts provides that a contractual obligation may be discharged when “a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made.” Where one party to a contract is excused from performance due to an unforeseen event that makes performance impracticable, the other party is typically also excused from performance.
When relying on impracticability and frustration of purpose, parties must still make reasonable efforts to overcome the impediment to performance. Additionally, if impracticability of performance or frustration of purpose is only temporary, the duty to perform may only be suspended temporarily. When the impracticability or frustration no longer exists, the party may then again be required to perform under the contract.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Michael Sheppeard, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
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Russia-Ukraine Crisis Brings Force Majeure Clauses Back into the Spotlight
Author: Michael J. Sheppeard
Russia-Ukraine Crisis Brings Force Majeure As the impact of the Ukraine-Russia crisis continues to spread, businesses may again need to revisit their contracts to determine how force majeure clauses may impact their contractual rights and obligations...
Many businesses received a crash course in force majeure clauses during the COVID-19 pandemic. As the impact of the Ukraine-Russia crisis continues to spread, businesses may again need to revisit their contracts to determine how force majeure clauses may impact their contractual rights and obligations.
Force Majeure Clauses
The term “force majeure” means “superior force” in French. In the context of a legal contract, it may relieve the parties from performing their duties under the contract in certain circumstances. These circumstances typically include those deemed beyond the parties’ control and make performance of the contract inadvisable, commercially impracticable, illegal, or impossible. Examples of some of these types of circumstances often include natural disasters or “acts of God” (hurricanes, floods, earthquakes, and other similar events) as well as manmade disasters (war, terrorism, civil disorder, supply shortages, and labor strikes).
While force majeure clauses are often considered “boilerplate,” the provisions can differ widely between contracts. Some standard provisions are worded very narrowly and, thus, may only apply in certain very limited circumstances. For example, some force majeure clauses may only excuse performance when it is impossible, rather than impractical (untimely, expensive, etc.). Other provisions will only list certain circumstances that excuse performance, rather than including a catchall such as “other unforeseeable events beyond the control of the parties.”
Russian Invasion of Ukraine Impacting Contractual Obligations
Businesses that may be impacted by the ongoing Russia-Ukraine crisis should quickly assess their contractual obligations. One of the first steps should be to evaluate whether you or the other parties to the contract may rely upon the force majeure clause and to what extent. As a result of the clause being deemed by many as “boilerplate,” many force majeure clauses may not specifically address the situation. Thus it is imperative that businesses understand what particular obligations can be abdicated and which remain in full force. The terms of the contract may also identify specific notice requirements, as well as the timeline for providing such notification. Notably, the party seeking to rely on the force majeure clause typically has the burden of establishing the fact that a covered force majeure event occurred and that the party complied with all notice requirements.
Businesses should also carefully review agreements to determine if either party is subject to mitigation or allocation requirements. For example, agreements often require the party relying on the occurrence of a force majeure event to use its “best efforts” and/or act “in good faith” to resume normal operations after the force majeure event has passed.
In the absence of an applicable force majeure provision, businesses may also rely on contract law principles, such as frustration of purpose and/or impossibility of performance. Frustration of purpose may apply when performance of a contract becomes worthless to a contracting party, through no fault of its own. New Jersey and New York both follow the (Second) Restatement of Contracts, which describes three elements that must exist in such an instance: (1) “the purpose that is frustrated must have been a principal purpose of that party in making the contract”; (2) “the frustration must be substantial”; and (3) “the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made.”
As the name implies, impossibility—or impracticability— of performance applies when the actual performance of the contract is impossible. The (Second) Restatement of Contracts provides that a contractual obligation may be discharged when “a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made.” Where one party to a contract is excused from performance due to an unforeseen event that makes performance impracticable, the other party is typically also excused from performance.
When relying on impracticability and frustration of purpose, parties must still make reasonable efforts to overcome the impediment to performance. Additionally, if impracticability of performance or frustration of purpose is only temporary, the duty to perform may only be suspended temporarily. When the impracticability or frustration no longer exists, the party may then again be required to perform under the contract.
If you have questions, please contact us
If you have any questions or if you would like to discuss the matter further, please contact me, Michael Sheppeard, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.
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