Paraphrasing an answer that U.S. Secretary of Defense Donald Rumsfeld gave to a question during a news briefing in early 2002: there are things we know we know (known knowns); there are some things we know we do not know (known unknowns); and there are things that we don’t know we don’t know (unknown unknowns). Currently, we likely find ourselves on an unknown timeline. For example, if we were to go back in time 6 months, very few could have bet on large populations being quarantined, the economic chaos of massive business shuddering, and that the largest global sporting event – the Summer Olympics – would be postponed for a year due to the spread of a virus, and yet, here we are. Unfortunately, sometimes unpredictable events which can significantly disrupt our plans happen. In terms of contract law, these unpredictable events are called force majeure, and they are today’s word.
A French legal term literally meaning ‘superior strength’, force majeure, much like the Latin cas major or the English act of God, is a contractual clause which removes liabilities for the parties if an extraordinary event keeps at least one of the parties from fulfilling its contractual obligations. While what defines “extraordinary” can be open to interpretation, force majeure typically applies to abnormally bad events, such as war, volcano eruptions, severe hurricanes and flooding, etc. Though first appearing in Peter Lund Simmonds’ 1858 A Dictionary of Trade Products, Commercial, Manufacturing, and Technical Terms, the term was first used in the English periodical The Academy, which on the 8 September 1883 wrote that: “Tyranny, upheld by law, will generally be ‘tempered’ by outrage, so long as a force majeure prevents its being met in any other way.”
Given that legal terminology can be somewhat wonky and confusing, let’s look at the term through the financial lens of the upcoming Tokyo Olympics. The additional cost of postponing the Olympics for a year is currently expected to be EUR 2.5 billion to over EUR 5 billion. Moreover, the delay will require new leases on venues, additional maintenance, and negate real estate development slated to occur at the Olympic Village after the previously expected August 2020 end of the games. Local sponsors, who have paid more than EUR 3 billion for the Olympics advertising boon, want to know how their investment will be affected. For a summer Olympic games which were initially expected to cost EUR 6.6 billion in 2013, but have, according to a national audit in December, exploded to a cost of EUR 25 billion, the big question will be who is responsible for and can be expected to pay for what (read more on the Olympics and implications of ‘force majeure’ in our Sports Law: Will Humans Ever Play Fair and What Is ‘Force Majeure’? article) – and much of this depends on the interpretation and wording of the force majeure.
The wording and interpretation are important because what exactly constitutes force majeure does not have a consistent understanding and application across legal systems. French law, for instance, applies 3 tests to determine if an event was force majeure: was it external; was it unforeseeable; and was it irresistible. German law (which, like French law, is also civil law, but with differences) also includes the concept of force majeure, but contractual liability issues may remain. Conversely, in common law countries (aka the Anglosphere), force majeure isn’t automatically applied – it all depends on what events qualify under the specified terms of the contract. The devil is always in the details, and with the coronavirus impacting the ability of business around the globe to maintain operations and fulfil existing contractual obligations, corporate lawyers are to proactively access the specific terms and conditions of all contracted FM clauses and insurance policies.