Many years ago, before the pandemic and the economic uncertainty we’re facing today, Ramon, a meat supplier, entered into a supply contract with ABC Meat Corporation, a meat product distributor. The relationship went smoothly for many years, but when the COVID-19 virus struck, Ramon was confronted with having to reduce his staff to comply with local restrictions and frequently forced to shut down as infection rates among his employees soared despite all the precautions he took. Moreover, Ramon’s own suppliers of meat products experienced the same challenges he did, and supply chains became strained.
The arrangement between Ramon and ABC was that a specific volume of meat products would be shipped to ABC distribution centers every two weeks, with ABC advancing Ramon funds at the beginning of each month. But as the pandemic progressed, it became increasingly difficult for Ramon to meet supply targets to the point that ABC began threatening to terminate their contract.
Ramon, who had an exclusive relationship with ABC, his largest client, knew that if the contract was terminated, his business would go under.
After searching his desk, Ramon found, at the bottom of the bottom drawer, the signed contract with ABC. Reviewing the contract terms, he came across a provision titled “Force Majeure” (literally “Superior Force” in French), which provided that “if either party could not perform under this Agreement for reason of acts of God, acts of terrorism, labor unrest, boycotts, war, restraints imposed by government authority or any other reason, the obligation to perform was discharged for a period of up to 90 days.” What Ramon needed more than anything else was breathing space to re-define his supply chains, shore up his work force, and secure more business loans to help finance operations. If ABC could immediately terminate their contract, securing additional financial support would be impossible. Could this Force Majeure provision help?
Force Majeure (“FM” for short) clauses are, generally, the orphan provisions in many commercial contracts — imported from standard form agreements in the manner of boilerplate language without much consideration and soon forgotten. The purpose of such clauses is to provide a means of relieving the parties of their contractual obligations in the event of a circumstance beyond their anticipation and control that disables one party or the other from performing its obligations under their contract. Because COVID-19 has resulted in many supply chains being disrupted, there is new interest in these provisions — how they are interpreted and can be applied.
To begin with, the phrase “any other reasons” often really means “any other reasons like the reasons previously mentioned.” Contract interpretation can vary depending on state law, but FM clauses are usually interpreted restrictively, meaning that a court is unlikely to read language into the contract that is not expressly there. This general rule governs how these “catch all” phrases seen in FM clauses are interpreted. The challenge, then, is to argue that, in some way, the circumstances of COVID-19 are covered by the FM language. Obviously, the FM clause did not specifically cite pandemics or epidemics, a situation that the parties did not contemplate at the time their agreement was being negotiated, but the provision did expressly provide that “restraints imposed by government authority” was a situation that could trigger FM.
In response to ABC’s recent lawyer’s letter, threatening contact termination, Ramon called up the CEO of ABC and pointed out that under the FM provision, Ramon’s company was entitled to a 90-day moratorium on having to meet shipment targets because local government restrictions, which required him and his own suppliers to reduce staff levels owing to the pandemic, made it impossible for Ramon to meet those targets. Acknowledging that terminating ABC’s agreement with Ramon could result in costly litigation, ABC agreed to allow him to ship less product for a 90-day period. Ramon was not out of the woods, but he bought himself some time to shore up his business. He was also in open communications with ABC which, itself, was beginning to experience less demand owing to how the pandemic was affecting its restaurant customers. All told, invoking Force Majeure was not a panacea to the threats posed by the pandemic, but did serve to help sustain a commercial relationship without which Ramon’s business would, likely, have failed.
In our next article, we will examine further the language of Force Majeure clauses; when they can be a good thing, and when they can be more trouble than they are worth.