What Is The Legal Definition of Force Majeure
The law that governs the agreement at issue determines how force majeure is defined. Every US state has its own set of rules and a summary of each state’s rules is beyond the scope of this writing. However, given the influence of Delaware law on corporate America and the fact that its law is often referred to, and copied by, the other US states, it is useful to understand how Delaware law addresses the issue.
Force Majeure under Delaware Law. Since 2018, provisions in agreements that detail the events that constitute force majeure and how such events affect the rights of the parties are common.
There is no single definition.
It is all about the specific wording of a provision. There are no rules with respect to what constitutes force majeure. Similarly, there are no rules with respect to the consequences of force majeure. Instead, Delaware law permits the parties to a contract to establish the rules they wish to apply and the Delaware courts apply the provisions as the parties craft them. Delaware courts do not believe it is the court’s job to establish the rules.
The intent of the parties matters. The provisions of a contract are strictly construed. Risks associated with a contract are allocated in accordance with the rules established as a result of the parties’ negotiations. As noted by the Delaware Court of Chancery, “[i]t is not the Court’s role to rewrite the contract between sophisticated market participants, allocating the risk of any agreement after the fact, to suit the court’s sense of equity or fairness.” Akorn, Inc. v. Fresenius Kabi AG, No. CV 2018-0300-JTL, 2018 WL 4719347, at 151 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018).
Does Legal Definition Of Force Majeure Include Epidemics?
It may or may not under Delaware law. As noted above, whether an epidemic constitutes force majeure depends upon the specific wording in the agreement. To date, no Delaware court has had to determine the impact of a pandemic. However, the way in which Delaware courts have addressed force majeure in other contexts is instructive.
Force Majeure Event Occurs But No Recovery. A material adverse effect (an “MAE”) may constitute force majeure and trigger the right of a party to cancel a merger. The Delaware courts considered a merger agreement that carefully detailed the types of events that constituted a MAE. The list included events that adversely impacted the industry in which the parties participated. However, the agreement also provided that in order for the MAE to trigger the right of a party to cancel the merger, the MAE must disproportionately impact a party to the agreement.
No Recovery Since Force Majeure Event Is Foreseeable. In lieu of an agreement that sets forth in detail the events that constitute force majeure and its impact on the allocation of risk, an agreement may include no more than a very broad definition of force majeure. However, even the broad coverage of such a provision may not bring relief if the cause of force majeure was foreseeable. The Delaware courts have, by way of example, declined to find a right to cancel a contract where poor weather increased gas prices and unfavorable exchange rates negatively impacted the financial performance of a party.
No Right to Cancel Unless Right is Explicit.
The scope of a provision that sets forth the events that constitute force majeure is not expanded by words such as “or any other reason whatsoever beyond the control of [a party].” Delaware courts have referred to such language as a “catch-all” phrase and requires such a phrase to be construed within the context established by the listed events. A Delaware court will not expand the scope of an enumerated force majeure event “[u]nless the parties make it clear that such phases are intended to expand the possible circumstances justifying a force majeure event.” See, e.g., Stroud v. Forest Gate Dev. Corp., 2004 WL 1087373, at 14 (Del. Ch. May 5, 2004).
How Should Force Majeure Be Proved? Do Authorities Provide Certificates?
No Delaware authority is in the position to provide a certificate that takes into account the facts of every event and its impact on the specific circumstances of a party to a contract. A Delaware court or an alternative dispute mechanism will resolve the matter.
Context Matters. How a party proves the existence of force majeure is a question of fact. Delaware courts have noted the “heavy burden” a party has to successfully invoke a force majeure clause and avoid its obligation to close.
Duration of Force Majeure Impact Matters. The Delaware courts have directed, for example, that “[a] short-term hiccup in earnings…” as a result of force majeure event is not adequate proof. Instead, the event must an impact that is of a “durationally-significant manner”. See Akorn at 130. How this is proven will range from a review of financial reports to a formal analysis provided by a financial expert or economist.
Is The Spread Of Covid-19 Considered Force Majeure? What Is the Threshold for Considering a Virus Force Majeure e.g. does Covid-19 Amount To Force Majeure Only After An Official Emergency Situation Has Been Declared?
A Government’s Declaration of Emergency as a Result of Covid-19 is Objective Evidence of a Force Majeure. This, of course, assumes that the declaration is made, and the restrictions established, by third parties who are not within the control of the parties to a contract. The length and breadth of the restrictions established by the government should provide support to establish the amount and duration of the negative impact on the parties as a result of force majeure.
However, Whether Covid-19 Constitutes Force Majeure Depends Upon, as Noted Above, on the Language in the Agreement at Issue. The Delaware courts interpret a force majeure provision, as with any other contractual provision, based upon the words chosen by the drafters.
Further, as Noted Above, Even if Covid-19 Constitutes Force Majeure, it May Not Discharge the Parties to a Contract from Their Obligations. A force majeure provision may impose additional requirements.
This article is intended for informational purposes only.
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