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COVID-19 and Force Majeure Clauses: Business Considerations

Individuals and companies who have entered into commercial contracts should engage legal counsel in asking the question: “is the severity of the COVID-19 outbreak and related economic ramifications so great that it enables us to temporarily (or permanently) be excused from performance under our existing contracts?”

As is often the case with difficult legal questions, the answer is “it depends.”  To better understand why this is the case, one needs to understand, among other things, “force majeure” provisions in commercial contracts, their purpose, when they apply, and how to invoke them.  In the absence of a force majeure clause, parties to a contract may also be able to turn to common law doctrines of “impracticability,” “illegality,” “frustration of purpose,” and “void as against public policy.”  These common law doctrines will be covered in a subsequent post.

What is a “Force Majeure” Provision? 

Many contracts contain “force majeure” provisions, which allow a party to sustain or terminate the performance of its obligations when certain circumstances beyond their control arise that make performance under the contract commercially impracticable or impossible.  For many years, force majeure provisions were treated as boilerplate language and paid little attention to during the negotiation and drafting process.  However, with the spread of COVID-19 and the significant impact it is having on the world economy—from manufacturing capacity to supply chain services—these provisions are now becoming an important potential source of legal rights that could provide significant business advantages in reacting to, and planning around, the COVID-19 pandemic.

When is a “Force Majeure” Provision Triggered?

The COVID-19 pandemic and the related economic and social stressors it is producing—including the implementation of travel, movement, and social-gathering restrictions—have altered the potential availability of force majeure provisions to parties unable to perform under existing commercial contracts.  Whether these provisions can be successfully invoked is something that must be analyzed on a contract-by-contract basis. 

While some provisions include a “closed list” of qualifying events (e.g., pandemics, epidemics, quarantines, acts of God, terrorism, war, etc.), other provisions are more open-ended and subject to more liberal interpretations.  If a force majeure provision specifically contemplates epidemics, pandemics, and/or event quarantines then the COVID-19 crisis may trigger the provision, especially in light of the World Health Organization’s declaration that COVID-19 is a pandemic and the U.S. government’s policy responses (e.g., imposition of advised quarantines, restrictions on group meetings, travel limitations, etc.).  Similarly, if the force majeure provision applies to a governmental agency imposing restrictions in response to an emergency (e.g., personal and commercial travel or shopping bans, quarantine zones, etc.), the COVID-19 pandemic and may trigger the provision.  Regardless of the contract language, a party seeking to successfully invoke a force majeure provision usually must meet the following three elements:

  • the event must be beyond the control of the affected party;
  • the affected party’s ability to perform its obligations under the contract must have been made commercially impracticable, impossible, illegal, or similar; and
  • the affected party must have taken reasonable steps to seek to avoid or mitigate the event or its consequences.

Whether these elements are satisfied is situation-specific and requires close analysis by a competent attorney.

What Should Businesses do on a Going Forward Basis?

Engaging a competent attorney to conduct a review of your contracts’ force majeure provisions will not only provide clarity on the potential applicability of the provisions in light of the COVID-19 crisis, but also highlight other tangential issues, such as whether the contract has certain “notice” and/or “reporting” requirements.  Such provisions will often require the party seeking exclusion from its contractual responsibilities to report certain information, and in a certain manner, to the other contracting part(ies).  These provisions can vary significantly in terms of their requirements.  Accordingly, expeditious and careful compliance may be critical to maintaining one’s force majeure-related rights.

It is also important to engage an attorney to review these force majeure clauses not only to ensure accurate analysis of their applicability and requirements, but also to reduce potential liability associated with a contracting party wrongfully declaring force majeure.  For if a party declares a force majeure provision applicable, but the party is not actually contractually entitled to do so, the party may inadvertently breach the contract in question – whether via failure to perform or anticipatory repudiation.  Potentially making matters worse, an affirmative statement by a party to the other contracting part(ies) invoking the force majeure provision amounts to evidence that the party no longer intends to perform the contract.

Conclusion.

Force majeure provisions, once a backwater of contract drafting, have become a critical legal tool to alleviate business pressures associated with COVID-19, and should be a key component of business strategies going forward.  These provisions, when applicable, can provide significant business relief.  Whether this is the case is highly sensitive to the wording of contract and requires a fact-intensive, close review. We suggest all individuals with commercial contracts seek legal advice on these issues.


Disclaimer: This article is designed for general information only.  The information presented herein does not constitute legal advice or the formation of a lawyer/client relationship.