In its most basic form, a contract is a promise to perform. By entering into a contract—whether a personal lending arrangement or a complex commercial acquisition—parties subject themselves to the negotiated terms of their agreement.
Ideally, the contract anticipates the consequences of a party breaking that promise. But what if a party fails to perform because of an unlikely or entirely unexpected circumstance, such as a devastating tornado, a work stoppage, or even a government-mandated shutdown during a pandemic?
What is a force majeure clause?
Enter the force majeure or “act of God” clause. Often treated as one of the standard “boilerplate” contract provisions skimmed just before signing, a force majeure clause is intended to allocate between contracting parties the risk of non-performance in the midst of extraordinary events. Typical force majeure clauses will modify a party’s obligations under the contract if it is prevented from performing as anticipated due to specific events, such as natural disasters, war, governmental actions, and strikes.
Especially now, with the nation continuing to grapple with the COVID-19 crisis, it is especially important to understand how the concepts underlying the force majeure clause may affect your contracts. For instance, some force majeure clauses include pandemics as specifically-listed events—a practice sure to become more widely-adopted in the future. More common now, though, is for parties to identify an “act of God” as a triggering event.
What is an Act of God?
The concept of the “act of God” can be viewed from multiple perspectives. First, with reference to the specific force majeure language included in the contract at issue. Although it has not created a list of “acts of God” for these purposes, the North Dakota Supreme Court has stated that the “types of events consitut[ing] force majeure depend on the specific language included in the clause itself.”
For instance, consider a force majeure clause that appends a list of specific events, such as “earthquakes, terrorist activities, and labor interruptions,” with “and other acts of God.” In interpreting that language, a court may consider whether any given event is an “act of God” by evaluating whether it is an event similar in nature to one of the three events specifically listed.
Alternatively, consider that same force majeure clause, modified to read: “Acts of God, limited to earthquakes, terrorist activities, and labor interruptions.” In that case, a court would likely conclude that any event not specifically included in the clause would not be an excuse, since the language is limited.
There are an almost infinite number of variations of such clauses. The examples above are intended merely to make the point that the first place to start is, as always, with the actual language in your contract.
Does force majeure or an Act of God excuse failure to perform under contract?
Whether force majeure or an act of God excuses a party’s breach of a contract depends on a number of factors. The most important of these is, as noted above, the exact language of the contract at issue. For instance, even if the contract includes a force majeure clause and a specific triggering event or an “act of God” has occurred, the clause may only relax the breaching party’s obligations—for example, extending a payment deadline—rather than excusing a breach outright.
In addition, a party looking to avail itself of a force majeure clause in court will be required to prove a number of facts. The North Dakota Supreme Court has stated that a breaching party in these circumstances generally “bears the burden of proving that the event was beyond its control and without its fault or negligence,” and that the clause “must be accompanied by proof that the failure to perform was proximately caused by a contingency and that, in spite of skill, diligence, and good faith on the promisor’s part, performance remains impossible or unreasonably expensive.”
Can you claim an Act of God without having a specific clause in your contract?
A party without a force majeure clause may still try to argue the issue as a legal defense. Where a party seeks to assert an “act of God” defense in a contract without force majeure language, the excuse of its breach or damages tends also to depend on the exact circumstances of the event. For instance, in North Dakota, the successful defenses have come in situations involving flooding and rainfall, rather than wind events or temporary economic adversity.
The North Dakota Supreme Court has broadly described an “act of God” for these purposes to be “any accident, due directly and exclusively to natural causes without human intervention, which by no amount of foresight, pains, or care, reasonably to have been expected, could have been prevented.” This requires proving an event to be unprecedented and extraordinary, not reasonably anticipated, not reasonably provided against, and the sole cause of damage. This is a high threshold, with the unprecedented and extraordinary nature of the event and its being the sole cause of damage especially difficult to establish.
Similarly, under North Dakota statute, a party’s failure to fulfill an obligation may be excused in whole or in part when its performance is “prevented or delayed by an irresistible superhuman cause…unless the parties have agreed expressly to the contrary.” For these purposes, the North Dakota Supreme Court has stated that an “irresistible superhuman cause is an ‘act of God’ which operates without any aid or interference from man.”
Is COVID-19 an Act of God?
Whether the COVID-19 crisis is a triggering event under a force majeure provision or an “act of God” is greatly dependent on the language of the contract at issue and the nature of the disruption. The World Health Organization declared the COVID-19 crisis a “pandemic” on March 11, 2020, so to the extent the contract specifically identifies pandemics, it may well prove a triggering event.
With that said, the specific nature of the breach will be key. For example, a supplier who was forced by government action to close may well have a good excuse for not performing. On the other hand, simply being unable to meet financial obligations presents a much harder case, since it will be difficult for parties to prove that such a breach was caused solely by the pandemic and also that the general phenomenon of a business slowdown could not have been anticipated.