Why Force Majeure Provisions Matter More Than Ever
Recent global disruptions—from pandemics to supply chain breakdowns to natural disasters—have demonstrated the critical importance of carefully drafted force majeure provisions in commercial contracts. What was once viewed as boilerplate language has become the subject of intense litigation and negotiation as parties seek relief from obligations rendered impossible or impracticable by extraordinary events.
For private lenders, real estate investors, and business owners, understanding how to draft force majeure clauses that provide genuine protection (while maintaining workable contractual relationships) has become an essential risk management tool.
What Is Force Majeure?
“Force majeure” translates from French as “superior force”—referring to events beyond the reasonable control of contracting parties that prevent performance of contractual obligations. Unlike simple difficulty in performing or unexpected expense, force majeure addresses circumstances that make performance genuinely impossible or that destroy the essential purpose for which parties entered the contract.
Common Force Majeure Events
Traditional force majeure clauses typically include:
- Acts of God: Earthquakes, floods, hurricanes, tornadoes, wildfires
- War and Civil Unrest: Armed conflict, terrorism, riots, insurrection
- Government Actions: Embargoes, orders, regulations, expropriation
- Labor Disruptions: Strikes, lockouts, labor disputes
- Infrastructure Failures: Utilities failures, telecommunications breakdowns
- Pandemics and Epidemics: Widespread disease outbreaks and resulting government responses
The critical question in any force majeure dispute is whether the specific event that occurred falls within the contract’s definition of covered events.
Jurisdictional Differences in Interpreting Force Majeure
California’s Approach: Flexible Interpretation
California courts generally adopt a more expansive view of force majeure provisions compared to many other states. Under California law, a force majeure clause may excuse performance even for events not specifically enumerated in the contract, provided:
1. The event was unforeseeable at the time of contracting 2. The event was outside the affected party’s control 3. Performance has become genuinely impossible or impracticable
This approach recognizes that parties cannot anticipate every possible catastrophic event when drafting contracts, and courts should not penalize parties for failing to explicitly list an unprecedented occurrence.
New York’s Approach: Strict Construction
In contrast, New York courts tend to interpret force majeure clauses more narrowly. Under New York jurisprudence:
- Only events specifically listed in the force majeure provision typically qualify
- Catch-all phrases like “and other similar events” are interpreted narrowly—the “other events” must be similar in nature and magnitude to the specifically enumerated events
- Mere economic hardship or increased cost of performance generally does not excuse performance
This interpretive difference can be outcome-determinative in disputes, making choice of law provisions critical.
The Role of Choice of Law Clauses
Most commercial contracts include choice of law provisions specifying which state’s law will govern disputes. When drafting or negotiating contracts:
- Lenders and creditors often prefer New York law for its stricter interpretation (making it harder for borrowers to claim force majeure)
- Borrowers and obligors may prefer California law for its more flexible approach
- Real estate transactions often default to the law of the state where the property is located
If your contract lacks an express choice of law provision, courts will typically apply:
- The law of the state where the contract was executed, OR
- The law of the state where performance is to occur, OR
- The law of the state with the most significant relationship to the transaction
Given the uncertainty of default rules, always include an express choice of law provision.
Drafting Considerations for Private Lending Transactions
Balancing Lender and Borrower Interests
In loan documents, force majeure provisions must carefully balance competing interests:
- Monetary obligations (loan payments) should generally NOT be subject to force majeure excuses
- Interest should continue to accrue even during force majeure events
- Force majeure should only excuse non-monetary obligations (like construction milestones or operational covenants)
- Construction delays caused by force majeure events should extend project completion deadlines
- Operational covenants (like maintaining certain occupancy levels) should be suspended during qualifying events
- Cure periods for defaults should be tolled during force majeure events
Recommended Loan Document Provisions
Most well-drafted loan documents include language similar to:
“Force majeure events shall extend the time for performance of non-monetary obligations, but shall not excuse, delay, or suspend Borrower’s obligations to make payments of principal, interest, or other monetary amounts due under this Agreement. During any force majeure event, interest shall continue to accrue at the applicable rate.”
This approach protects lenders’ cash flow while providing borrowers reasonable accommodations for performance obligations truly affected by extraordinary events.
Key Elements of an Effective Force Majeure Clause
1. Clearly Define Covered Events
Avoid ambiguous language. Be specific about what events qualify:
2. Include “Beyond Reasonable Control” Language
Even specifically enumerated events should only excuse performance if they were truly beyond the affected party’s control. For example, a flood might not excuse performance if the flooding was caused by the obligor’s failure to maintain drainage systems.
3. Require Reasonable Efforts to Mitigate
California and most other jurisdictions require parties claiming force majeure to demonstrate reasonable mitigation efforts. Include language such as:
“The party seeking to invoke force majeure must demonstrate that it has used commercially reasonable efforts to avoid or mitigate the effects of the force majeure event, including by seeking alternative means of performance, obtaining substitute materials or services, and implementing contingency plans.”
4. Establish Notice Requirements
Require prompt notice of force majeure claims:
“The affected party must provide written notice of any claimed force majeure event within five (5) business days of its occurrence, specifying: (a) the nature of the force majeure event; (b) the specific contractual obligations affected; (c) the expected duration of the delay; and (d) the steps being taken to resume performance.”
5. Address Duration and Termination Rights
Long-duration force majeure events may effectively destroy the contract’s value. Include provisions addressing extended delays:
“If a force majeure event continues for more than ninety (90) days, either party may terminate this Agreement upon thirty (30) days’ written notice, without liability for such termination.”
6. Clarify Payment Obligations
Be explicit about whether monetary obligations are excused:
“Force majeure events shall not excuse, suspend, or delay any payment obligations under this Agreement, including but not limited to rental payments, loan payments, or amounts due upon invoicing.”
Common Law Alternatives to Force Majeure
Even contracts lacking force majeure clauses may provide relief through common law doctrines:
Impossibility of Performance
California recognizes that performance may be excused when an unforeseen event renders performance objectively impossible. The classic example: a contract to lease a specific building becomes impossible to perform when the building is destroyed by fire.
Importantly, impossibility requires true impossibility, not merely increased difficulty or cost.
Commercial Impracticability
A less stringent standard than impossibility, impracticability excuses performance when an unforeseen event makes performance excessively and unreasonably difficult or expensive, though not strictly impossible.
Courts typically require:
- The event was not foreseeable when the contract was formed
- The event makes performance commercially senseless
- The affected party did not assume the risk of the event occurring
Frustration of Purpose
Even if performance remains possible, a contract may be voided under frustration of purpose when an unforeseen event destroys the fundamental reason the parties entered the contract.
Frustration of purpose requires:
- The frustrated purpose must have been the principal purpose of the contract
- The event must have been unforeseeable
- The frustration must be substantial (not merely making the contract less profitable)
Practical Guidance: Invoking Force Majeure
If you believe a force majeure event entitles you to relief from contractual obligations:
Step 1: Review the Contract Carefully
- Identify any force majeure provision and read it closely
- Determine whether your event is specifically listed or could fall within catch-all language
- Check for notice requirements and time limits
- Verify what obligations are excused (non-monetary only? all performance?)
Step 2: Provide Immediate Notice
Don’t wait to invoke force majeure. Provide written notice as soon as you become aware that the event will affect your performance:
- Describe the event specifically
- Explain how it affects your ability to perform
- Estimate the duration of the delay
- Outline your mitigation efforts
Step 3: Document Mitigation Efforts
Maintain detailed records of all efforts to overcome or minimize the force majeure event’s impact:
- Alternative suppliers contacted
- Different performance methods explored
- Costs incurred trying to maintain performance
- Communications with third parties
Step 4: Consider Declaratory Relief
Rather than waiting to be sued for breach of contract, consider filing for declaratory relief—a court proceeding that determines rights and obligations without awarding damages.
Advantages of declaratory relief:
- You control the timing and framing of the legal issues
- The court can resolve interpretation questions without waiting for damages to accrue
- Relationships may be preserved through early resolution
Step 5: Maintain Open Communication
Even if you believe you have valid force majeure grounds, maintain professional communication with the other party:
- Provide regular updates on changed circumstances
- Propose alternative performance arrangements
- Seek mutually agreeable contract modifications
- Document all discussions
Lessons Learned from Recent Crises
The recent pandemic era provided valuable lessons for contract drafters:
Geraci LLP’s Approach to Contract Drafting
Our Corporate practice group assists clients with:
- Custom force majeure clauses tailored to specific industries and transaction types
- Contract review and negotiation focusing on force majeure and related risk allocation
- Dispute resolution when force majeure claims arise
- Declaratory relief actions to resolve contract interpretation issues proactively
Well-drafted contracts anticipate the unexpected. By investing in thoughtful force majeure provisions at the outset, parties can avoid costly litigation and preserve business relationships even in crisis situations.
Contact Geraci LLP’s Corporate Department
Geraci LLP counsels private lenders, real estate investors, and business owners on complex commercial transactions and contract disputes. Our attorneys combine practical business judgment with sophisticated legal analysis.
For a consultation regarding contract drafting or force majeure disputes, contact us today.
Geraci LLP Protecting Client Interests Through Thoughtful Contract Design Since 2007
This article is for informational purposes only and does not constitute legal advice. Force majeure law is highly jurisdiction-specific and fact-dependent. Consult with qualified legal counsel before invoking force majeure defenses or drafting force majeure provisions.
