Black Swan Events and Force Majeure Clauses

Force Majeure is a French term meaning superior force. It is also a contract clause that relieves parties from performance when an extraordinary event occurs. Such challenges, known as ‘black swan’ events or generically ‘Acts of God’, may be mitigated by a force majeure clause acknowledging that contracts can’t be fulfilled when issues are outside of everyone’s control.

Did the Coronavirus arise from bat soup in a filthy, fetid wild animal market? Or was it accidentally leaked from China’s national biology lab in Wuhan? It doesn’t really matter. It is a superior force that was not foreseeable. (Although some would argue that with so many novel infectious diseases arising over the last 20 years, epidemics should now be expected).

With that last thought in mind, going forward, you should work with your attorney to include specific force majeure provisions in your contracts. A well drafted clause may excuse performance during events that are beyond the reasonable control of the parties. These can include acts of terrorism, labor shortages and strikes, new government regulations, fire and floods. Events such as epidemics, pandemics, biological outbreaks and wide spread illness should now also be incorporated into force majeure clauses.

What if your current contract does not include such language or the event doesn’t trigger a force majeure clause? Your fall back position is the doctrine of “frustration of purpose.” This doctrine can excuse contractual performance if events have now made it impossible to perform, or the central purpose of the contract has been frustrated due to unforeseeable events. However, Courts do not favor upending contracts under this doctrine. You are better off relying on a well drafted force majeure clause.

It is interesting to note that a Chinese agency is issuing force majeure certificates to local companies unable to perform on their contracts due to the Coronavirus challenge. It would be nice to just wave a certificate and make all the issues go away. But in the United States and other common law countries, force majeure is a question of fact for the Court. Was the event reasonably foreseeable? Were any notice provisions complied with? Does prior case law shed any light on the current situation? These are all facts to be considered. A government certificate won’t work here.

Still, your Chinese counterpart is probably struggling even more than you are. Is litigation even advisable? And if so, could you even collect?

The bigger issue for everyone is to understand the nature and need for force majeure clauses in your contracts. Well, that and the need for alternate sources of supply outside of China.