How Does a “Force Majeure” Clause Affect Damage Calculations?
A lot of information has been circulating in the legal community about “force majeure”1 and its application in the current COVID-19 environment. An attorney was quoted in a recent article by The Wall Street Journal stating, “What we have here is an unprecedented nationwide force-majeure event.”2
From attorneys at Andrews Myers, “a typical force majeure clause in the United States (or applying the commercial laws of England and Wales) will expressly set out things considered beyond the parties’ reasonable control that are deemed force majeure events, such as:
- Unusually adverse weather,
- Acts of the public enemy (terrorism),
- Governmental actions
- and acts of God.”3
Less often, force majeure may be defined to include things such as labor disputes, strikes or the inability to obtain specific raw materials. Very rarely, a force majeure clause also refers to a pandemic or epidemic. There is typically a carve-out stating that force majeure events do not include market fluctuations or increased costs.4
Per attorneys at Bell Nunnally & Martin LLP, “Force majeure clauses are not ‘one size fits all.’ A pandemic may or may not be an event that triggers a force majeure clause. Further, even if the pandemic triggers a force majeure clause, it may not excuse your performance or another party’s performance entirely. Also, one cannot assume that the existence of a force majeure event is automatic—there may still be obligations to provide notice of the event.”5
If a force majeure clause specifically identifies an event, such as a pandemic, then performance or delay of performance is excused by the event’s occurrence, depending on the terms of the force majeure clause. The issue becomes more complicated if the force majeure clause does not specifically list the event in question. Most force majeure clauses will include a catch-all provision. For example, after listing a number of events—floods, fires, employee strikes or trade embargoes, for instance—the clause also may state, “… or other event or cause not enumerated that is beyond the reasonable control of the party or parties affected” to encompass other force majeure events the parties did not list.6
In addition, force majeure clauses also frequently include notice requirements. These notice provisions may require notice to be in writing and sent within a certain number of days following the force majeure event. Accordingly, time may be of the essence for you or a party to one of your agreements to claim protections of a force majeure clause.7
Damages Analysis Involving Force Majeure
When conducting a damages analysis, a forensic accountant is often provided with a set of assumptions and asked to calculate damages based on those assumptions. In addition, each party is asserting a damages theory in the litigation and presenting its respective evidence to support its side of the case. It is the financial expert’s responsibility to use due professional skepticism and care in identifying the damages theory, understand causation and its effect on the potential damages to be calculated in the case and, using provided assumptions, make the damage calculations.8
One example of how force majeure plays out in litigation comes from two recent disputes—Star Cinema Grill/Cinemex and L Brands/Sycamore Partners. In both cases, the parties have an agreement for the sale of the companies to the buyers and the buyer is reneging on the agreement to acquire. In each case, the respective buyer does not want to buy stores that have now been shuttered due to COVID-19-related government orders. It is not clear at this time whether the respective buyers are raising a specific legal claim of force majeure, but they are taking the position that they are not obligated to buy the respective businesses.
In a situation where a forensic accountant is working in a matter involving a force majeure issue, the forensic accountant might be asked to:
- Assume that force majeure does not apply and calculate damages
- Perform analyses of records to determine whether evidence can be presented that establishes the alleged breach of contract was caused by something other than the force majeure event
Nevertheless, in this unusual season, it is clear the force majeure clauses of many contracts are going to get a hard look.
As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. For more information, contact your BKD Trusted Advisor™ or submit the Contact Us form below.
1 Dictionary.com: “An unexpected and disruptive event that may operate to excuse a party from a contract; French: literally, superior force” ↩
2 “‘Act of God’ Disputes on The Upswing,” quoting David Marmins, The Wall Street Journal, Tuesday, April 21, 2020, page A3 ↩
3 https://www.andrewsmyers.com/covid-19-and-force-majeure/ ↩
4 https://www.andrewsmyers.com/covid-19-and-force-majeure/ ↩
5 https://www.bellnunnally.com/covid19-and-developmenttakedown-deals-knowing-when-force-majeure-does-and-does-not-apply ↩
6 https://www.bellnunnally.com/covid19-and-developmenttakedown-deals-knowing-when-force-majeure-does-and-does-not-apply ↩
7 https://www.bellnunnally.com/covid19-and-developmenttakedown-deals-knowing-when-force-majeure-does-and-does-not-apply ↩
8 See Litigation Services Handbook, The Role of the Financial Expert, Sixth Edition, Chapter 4 and The Comprehensive Guide to Lost Profits and Other Commercial Damages, Third Edition, Chapter 8; Note: Reference materials used by forensic accountants don’t specifically address the force majeure clause. ↩