Force Majeure/Act of God, Impossibility, Impracticability, and Frustration of Purpose-OH MY!

By: Attorney Joel Corcoran

I’ve seen more discussion about “Force Majeure/Act of God Clauses and the Doctrines of Impossibility, Impracticability, and Frustration of Purpose in the past two months than I’ve seen during twenty years of practicing law. Not to make light of the human and economic tragedies of the COVID-19 pandemic, but in a bit of gallows humor, lawyers are now living in a ludicrous bar exam question that is now a reality.

Every lawyer has to help clients muddle through the aforementioned clauses and doctrines. And, every lawyer has an opinion as to whether these clauses are harmful or beneficial.. We tend to pursue the lofty, philosophical conversations while leaving behind the practical, useful nuggets of information for our clients. Let’s focus on the fundamental points of “force majeure” that owners/managers of small businesses and nonprofits need to know.

In French, “force majeure” means “superior force.” In law, the term describes extraordinary, unpredictable, unforeseen events beyond anyone’s control -- otherwise called “an Act of God.” Force majeure events include riots and natural disasters, labor strikes and electrical blackouts, and government orders. If it rains on your wedding day, Alanis Morisette gets a song. But if the wedding is canceled due to a hurricane or typhoon, that is an Act of God.

Commercial contracts often include a force majeure clause excusing one, some, or all parties to that contract if they are not able to perform the requirements of that contract. At its heart, a force majeure clause describes who will bear the risk of the contract falling apart due to some unpredictable, unforeseen event beyond anyone’s control. It is a legal tool for determining who will bear the risk of financial and other losses if the contract cannot be performed and there is no other way to fairly assign those losses.

Let’s use a small business in the wedding industry as an example: a caterer. Most catering contracts require a significant financial deposit up front, which the caterer uses to purchase ingredients for the wedding banquet, order liquor for the bar, hire service personnel, and pay other advance costs. This deposit might cover 75% of the expected costs with the expectation that the caterer will work out the final bill with the wedding couple after the reception.

So what happens if the caterer backs out a month before the wedding? Or what happens if the couple breaks up and cancels the wedding?

If one side or the other fails to perform the contract due to their own faults or decisions, or due to events within their control, then they should take responsibility for their choices. That’s only fair. If our caterer cancels a month beforehand to take a more lucrative event contract, at the very least they should return the deposit. That’s only fair. If the couple breaks up, it may not be entirely their fault or their choice mutually, but it’s certainly not the caterer’s fault. The caterer should be able to keep the deposit (at least), and they may be entitled to some additional payment. That’s only fair.

But who gets that deposit if the event is cancelled by an “Act of God” rather than parties to the contract? What if it’s no one’s fault? Or anyone’s responsibility?

Using our caterer example, what if a typhoon sweeps through Portland a week before the wedding? The caterer isn’t at fault and should be able to keep that deposit. The wedding couple isn’t at fault and should get their deposit back. So who gets the deposit? The answer to that question depends on the force majeure clause.

A force majeure clause typically has three elements:

• A description of the triggering events (e.g., fires, riots, labor shortages, global pandemics, alien invasions);

• A performance threshold; and

• Assignment of financial losses.

The performance threshold tends to be the most contentious point of argument among parties to a contract when the force majeure clause comes into play. Invoking the clause requires not only the triggering event, but a determination that it would be impossible or impractical for any party to perform the contract.

Back to our caterer. If a major typhoon strikes Portland a week before the wedding, destroying the reception venue, it would be literally impossible for the caterer to perform the services required under the contract -- there is no place to hold a reception to be catered. But what if it was remotely possible for the caterer to still cater the wedding?

What if the venue survived well enough to hold the reception, but all the roads were blocked? It would still be possible for the caterer to get to the venue, they would just need a helicopter instead of a van. Or what if the venue survived, but the caterer’s kitchen was flooded? They could still find another kitchen to use, right? Couldn’t they find a kitchen outside the typhoon’s zone of destruction, say in Corvallis or Eugene? What if it is possible for the caterer to perform the contract, just not practical?

Under common law, we would fall back to the doctrine of impracticability. This doctrine comes into play when performance of the contract is still possible -- at least remotely possible -- but would be extraordinarily difficult and burdensome. Impossibility is objective, but impracticality is subjective.

Maybe our caterer could fly in by helicopter, but the costs would be extraordinary -- and far more than the catering fees they charge. Maybe our caterer could find another kitchen in Corvallis or Eugene, but is really fair to place that burden on them? Should we really require them to travel back and forth every day while prepping for the wedding? Or pay for food and lodging while away from Portland for several days? Those extra costs would be far more than the contractual fees due to them as well.

“Frustration of purpose” is often used alongside the doctrine of impracticality when analyzing force majeure events. To use some fancy legal language, “frustration of purpose” arises:

Where, at the time a contract is made, a party's principal purpose is substantially frustrated without his fault by a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty of that party to render performance arises, unless the language or circumstances indicate the contrary.

Our caterer’s principal purpose was to cater a wedding reception at a venue in Portland. That purpose was substantially frustrated by the first major typhoon to ever hit the city directly. Our caterer had no reason to know that a typhoon would hit Portland a week before the reception. In fact, a typhoon never came up in conversations about the contract with the wedding couple. No one would have believed that a typhoon would hit Portland the week before. So, our caterer no longer has a duty to provide those catering services -- unless the language or circumstances indicate the contrary.

What might “indicate the contrary”? Something like a clause in the contract saying that, if a force majeure event occurs, the wedding reception will be postponed three months. Or held at an alternative venue within 50 miles of Portland. 

Six months ago, no one expected a global pandemic to shut down this year’s wedding season in Oregon. We are starting to get past the most restrictive quarantine and self-isolation measures, but large gatherings -- like wedding receptions -- might still be prohibited for another year. Or more.

If you own/manage a small business or nonprofit and you’re looking for a some good to come out of the COVID-19 pandemic, then you might appreciate this whole mess as a real-world example of why force majeure clauses aren’t just fluffy legal boilerplate. They are critically important tools to successful commercial endeavors. Whenever we get back to normal -- or arrive at whatever the new normal will be -- the lessons learned in the midst of this tragedy could benefit us all.

Disclaimer: Rational Unicorn Legal Services PC provides this blog as an informational resource for our clients and the community at large. This post is not a substitute for legal research nor a legal analysis of specific legal issues. We offer this information for education purposes, not as a legal service. If you have questions about specific legal issues, rights, or remedies, please consult an attorney.