What Is a Force Majeure Clause, and What Does It Mean for Mortgages?
In French, it means superior force. However, in legalese, the term force majeure refers to a clause that can allow a person or business to extricate themselves from a contract.
“In general, it’s a force outside the control of a party,” says Denver, CO, contracts attorney Susan Goodman. “What the force majeure clause says is: If there’s an act of force majeure, then performance is excused if the performance is affected by that act.”
In even plainer English, it means: If something completely unpredictable occurs, a contract may be voided.
The current pandemic certainly seems to fit the bill, and will have contract holders invoking force majeure for relief from creditors.
However, mortgage holders looking for a way out of their debt obligations are likely to be out of luck when it comes to following the path of force majeure. Here’s how force majeure works in a contract.
What is an act of force majeure?
Contracts with a force majeure clause often list (very) specific potential calamities. If any of those calamities come to pass, a contracted party is allowed to back out of the deal with no penalty.
Force majeure events often written into contracts include:
- “Acts of God,” which often include severe weather, floods, earthquakes, hurricanes, fires, etc.
- Acts of war
- Acts of terrorism
- Acts of government authorities
- Strikes or labor disputes
- An inability to secure materials
- Other causes beyond the reasonable control of a party
Do all contracts have force majeure clauses?
Force majeure clauses are almost always written into business-to-business contracts.
However, personal mortgages usually do not contain force majeure clauses. Neither do apartment leases or contracts for home improvements.
Commercial leases and development projects often do, and those clauses may be invoked due to COVID-19.
“You’re seeing a lot of activity on the on the [commercial] leasing front now with the argument of force majeure,” says Jack Fersko, co-chair of the real estate department at the law firm Greenbaum, Rowe, Smith, & Davis LLP in New Jersey and co-chair of the American Bar Association’s real estate section committee.
Businesses “can’t use the space—whether it is because of the virus, which has closed operations down, or [because of local] government orders.”
Construction firms might also invoke the clause if they’re unable to meet deadlines or milestones on a development project. Adding to the confusion is that each state has different requirements for force majeure clauses, which means there’s no one-size-fits-all option.
Invoking a force majeure clause
By definition, an act of force majeure must prevent one or both parties from performing a service listed in the contract.
But economic hardship is not a reason to invoke force majeure.
“Anybody can always claim economic hardship. If your company goes into bankruptcy, that doesn’t void a contract, and you can’t get out of it by force majeure,” says Goodman.
As always, the key for consumers is: Be aware of all terms in any contract.
Courts around the country are already investigating COVID-19 and how it might relate to force majeure.
“I think it’s important to point out that this is such a unique situation. We’re already hearing that courts are treating things differently than one might expect—like not calling this an act of God,” Goodman says.
Fersko adds that there isn’t much legal precedent for the current crisis.
“I guess we’ll look to fall back to the early 1900s with the flu. We’ll look to other events in history that may be akin to this, and see what sort of case law evolved from that,” he says.
“In many respects, this being a worldwide pandemic, it’s certainly going to create some novel legal issues.”
Future contracts are likely to include allowance for pandemics
“Force majeure clauses are all written differently,” Goodman explains. She adds that she has seen some clauses with the word “epidemic,” but none with the word “pandemic.”
That will change, of course, after the coronavirus outbreak.
“Most force majeures after 9/11 added terrorism to the clauses. It was never in it before, because nobody really thought of it—because it wasn’t really part of our society,” Goodman says.
“I think pandemics and epidemics are going to be added to every force majeure clause. Attorneys are already advising their clients to do that.”
The key to a force majeure event is its unpredictability. However, if an unfortunate event or disaster was something that you could and should have prepared for, it’s nearly impossible to invoke the clause.