Best Practices When Declaring Force Majeure

There have been a lot of articles written recently on how force majeure clauses are interpreted and their invocation in light of the COVID-19 pandemic. Here are some of our favorites. 

Force Majeure and the Doctrine of Frustration (Paul Hastings)

Evaluating Your Force Majeure Clause under Covid-19 (Jenner Block)

Dispute Resolution Procedures under Force Majeure (Wilmer Hale)

Force Majeure Contracts in Texas (Akerman)

Although the ability to declare force majeure is based on the specific terms of the contract at issue, Governor Gregg Abbott’s recent Order regarding travel from states such as Louisiana and any future orders that may come from his or other government officials before the end of this pandemic, have certainly increased the likelihood that declarations of force majeure will be upheld by the courts.

The purpose of this article is to highlight some of the best practices that parties to a contract should consider taking prior to, during and following the declaration of force majeure.

1. Review Your Contracts Carefully

Courts have repeatedly held that whether a declaration of force majeure is proper in a given situation is highly dependent on the actual wording of the force majeure clause in the contract at issue. Be wary of language in the force majeure clause that only states the term “force majeure,” as it might not provide you much protection if it does not list specific events that will trigger the clause. Id. Additionally, certain contracts may have notice requirements to the other party or they may set a time limit on how long obligations may be suspended. They may also exempt payment for goods already delivered or services already performed.

2. Stay Informed and Document All Aspects of the Force Majeure on Which You Are Relying

If your clause cites an inability to obtain equipment, document the emails coming from your equipment suppliers on this issue. If your clause cites government order, document when the orders were issued. Keeping proper records will be critical to protecting your company, as you may later need to show that your inability to perform such contractual obligations was outside of your “reasonable” control.

3. Notify the Other Party

As stated above, some contracts require notice to the other party, while others do not. Force majeure is a defense and therefore notice is not required to be given (unless required by contract) until a claim is made for non-performance under the contract. But unless you have some compelling reason not to provide notice, it is a best practice to notify the other contracting party.

4. Track When the Force Majeure Event Ends

Stay diligent in tracking the events that caused your declaration of force majeure and track your efforts to continue compliance with the contract. Notify the other party when you believe the force majeure has passed (if you notified them previously) and of your plans to continue performance under the contract.

5. Implement a Litigation Hold

A litigation hold (also referred to as a document hold) is an instruction within a business organization directing employees to preserve (and refrain from destroying or modifying) certain records and information (both paper and electronic) that may be relevant to a pending or anticipated lawsuit. The ultimate purpose of a litigation hold is to ensure that a company complies with its duty to preserve and produce relevant information, including electronically stored information (ESI). If you think that the other contracting party may make a claim with regard to your declaration of force majeure, best practices would call for a litigation hold.

Paycheck Protection Program Applications is Open

Signed into law on March 27, 2020, the Paycheck Protection Program is designed to give small-businesses who need the cash a short-term loan to continue to maintain their payroll over the next two months. Borrowers who take advantage of the program are eligible to have the entire principal amount of the loan forgiven at the end of eight weeks so long as they maintain their current full-time employee headcount and salaries, provided that the funds are used on payroll and other approved costs. This loan forgiveness can turn the term loan into a cash infusion before any payments are ever due. If you have questions about whether your company is eligible for a Paycheck Protection Program loan or how to apply, please contact us soon. The program is expected to be fully subscribed.

If you have any questions about this Newsletter or would like some advice on interpreting the force majeure clause in any of your contracts, please feel free to reach out to our office at 832-831-2289.

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