Force Majeure: Contractual Performance and Commercial Agreements in a COVID-19 World
March 20, 2020
By: Paul R. Janda and Gil B. Selinger
Because of the World Health Organization’s declaration of “pandemic” from the spread of COVID-19 (also known as the coronavirus), businesses are faced with mounting and substantial challenges, such as delays, closures, cancellations, workforce issues, and states of emergency. Are employment and workforce issues causing operational struggles? Are disruptions to the supply chains causing adverse effects to your business? Are preventative shut-downs and cancellations causing substantial business losses and inability to service customers and patrons? Is manufacturing sufficient to meet demand and contract requirements, whether domestic or international? Business owners are struggling with these and many other similar issues. What should a business, be it a supplier, purchaser, or business that offers goods and services to the public be doing to protect themselves and mitigate the downside to their business? We recommend that businesses begin by conducting a close review of all of their material contracts to determine what rights and remedies might be available if they or the other party cannot perform under the contract because of issues stemming from COVID-19.
Many contracts contain “force majeure” clauses that may permit businesses to excuse or defer performance under a contract based on the effects of the COVID-19 pandemic. Force Majeure clauses come in many shapes and sizes and often depend on the proximity to a similar event. A recent analysis of commercial agreements showed that pandemics were specifically mentioned (for better or worse) in a vast majority of force majeure clauses in 2009–2011 following the outbreak of the H1N1 Flu. Any clause that excuses performance for occurrences beyond the control of the party, for example, for “acts of God, fire, flood, war, or any other similar circumstance” might be classified as a force majeure clause. Unfortunately, COVID 19 may prove to be as destructive as a fire or flood, if not more so, for a broad range of businesses and industries, making these clauses timely for consideration.
Do You Have Relief Under a Force Majeure Clause?
After an event like the COVID-19 pandemic, when business situations arise and a business wants to determine if it has access to relief, in one way or another, via the force majeure event, the analysis must be conducted under the terms of the agreement. It may or may not contain a force majeure clause at all, but will define the qualifications and ramifications that would allow a party an excuse not to perform under the agreement. The actual force majeure event, in the current situation, the COVID-19 pandemic, must be analyzed under the governing law of the contract to determine the availability and scope of such a defense.
When businesses or their advisors review their own agreements, the overarching question is whether COVID-19 falls within the types of things described by the provision, in other words, whether it is a “qualifying event.” If a force majeure clause includes specific public health-related language, such as “flu, epidemic, serious illness or plagues, disease, emergency or outbreak,” COVID-19 is likely to be a qualifying event. However, most force majeure provisions do not have specific public health terms, so the analysis will be more difficult. Many contracts distinguish between political or legal events on the one hand and “natural” events on the other, and while COVID-19 is certainly a natural event, under some agreements, the government response will constitute a political or legal event. Adding still more complication, states differ in their interpretation of clauses that end in a catch-all such as “and other similar circumstances.” For example, it is harder to invoke a force majeure provision under New York law than it might be in Delaware if there is no specific public health language.
There are many issues to consider with the language of the clause itself, but a primary analysis begins with these inquiries:
- Does the agreement contain an express prevision in the agreement allowing that performance under the agreement be suspended or discharged based on a force majeure event?
- In the context of COVID-19, how has the pandemic prevented, hindered or delayed the performance of the agreement?
- Were the reasonable expectations of either party to the agreement frustrated by circumstances which were unforeseeable or out of the parties’ control?
- Is a certain type of notice required under the agreement before the effectiveness of force majeure clause and in what form?
- What state and local regulatory orders, including existing regulations, apply to performance under the agreement and are there any actions or make decisions that are mandated of one of the parties to the agreement?
The next point of analysis is to determine what the force majeure clause allows the affected party to do. Can the contract be terminated? Delayed performance or deliverables? Forebearance on payments? In a real estate context, issues arise related to rent payments, triple net payments, mitigation obligations of landlords, etc. Since force majeure clauses are often “boiler plate,” the language does not specifically speak to remedy.
Even if COVID-19 or circumstances related to it constitute a qualifying event, the party seeking to invoke the clause will still need to prove it was prevented from performing the contract, not just that performance became more difficult, and that it made all reasonable efforts to avoid or mitigate the result. Here, factual disputes may arise regarding whether the failure to perform was caused by a force majeure event or was actually triggered by a resulting economic downtown, in which case, it would most likely not fit within the scope of a force majeure clause.
What to Do If a Force Majeure Provision Might Apply to Your Business
Given the scope of COVID-19 and the variety of force majeure clauses, many enterprises are likely to benefit from these provisions. But, even though your case may appear clear to you, judges, rather than juries, decide the legal meaning of contractual language. Any sympathies a judge may have for a party affected by COVID 19 will be offset by their interest in seeing that each side gets the benefit for which it bargained. Furthermore, a party seeking to use a force majeure provision must ensure that it complied with any applicable limits on the clause, such as provisions requiring a particular type or time of notice to the other party.
Especially as access to the courts is currently limited, business leaders seeking to benefit from a force majeure clause should make well-informed decisions about the applicability of a provision, notify the proper party, and use whatever remedies are available, while documenting the ways their business is affected by the event, the steps taken to either attempt to perform or mitigate any losses, and communications with the other party. Notice to the counterparty should state how, if at all, the business intends to perform in the future under the agreement. In a spirit of cooperation, such notice can lead to additional negotiations between the parties as to how to navigate the event. Ideally, most situations will resolve without having to resort to court action, especially with many courts closed or only open for emergency procedures, of which nonperformance under most agreements would not qualify, but recognize that any decision use a force majeure provision may later be subject to judicial scrutiny. Counsel can help you understand your options, including other defenses to enforcement of the agreement, such as impossibility of performance or frustration of purpose, and facilitate any necessary negotiations or litigation.