Can Companies Rely on Force Majeure During the Novel Coronavirus (COVID-19) Pandemic?
For companies that are unable to meet their contractual performance obligations due to the government restrictions imposed during the COVID-19 outbreak, force majeure clauses may provide a source of relief.
On March 13, 2020 President Trump declared the novel coronavirus (COVID-19) outbreak a national emergency. Since then, Americans across the country have had their daily lives upended due to restrictions imposed at the local, state, and national levels in order to slow the spread of the virus. Most companies have sent employees to work from home; airline travel, while not banned, is only supposed to be used for emergency situations; and gatherings involving more than 10 people have been prohibited. With such constraints on the American (and world) economy, parties to commercial contracts may now find themselves unable to perform their contracted obligations. Whether a party is still responsible for performance or may be subject to penalties for non-performance is dependent, at least in part, on whether the parties’ contract contains a force majeure clause.
What is a Force Majeure Clause?
A force majeure clause (French for “superior force”) is a contract provision that relieves the contracting parties from performing their contractual obligations when circumstances beyond their control make performance commercially impracticable, illegal, or, in most cases, impossible. A force majeure clause must be specifically written into a contract—there is no common law right to invoke force majeure in the United States as there is in some other countries.
The language of a force majeure clause must identify the specific circumstances under which the clause can be invoked, and it is important when drafting a force majeure clause to include any and all types of circumstances that could potentially impede or prevent performance despite the parties’ efforts to comply. Here is an example of a fairly standard force majeure clause:
“A ‘Force Majeure Event’ means the occurrence of: Any act of war, terrorism, fire, flood, hurricane, earthquake, explosion, strike, lockout, slowdown, prolonged shortage of energy supplies, acts of state or governmental action prohibiting or impeding any party from performing its respective obligation, or an act of God.”
“Neither Party shall be in breach of its obligations under this Agreement (other than payment obligations) or incur any liability to the other Party for any losses or damages of any nature whatsoever incurred or suffered by that other (otherwise than under any express indemnity in this Agreement) if and to the extent that it is prevented from carrying out those obligations by, or such losses or damages are caused by, a Force Majeure Event except to the extent that the relevant breach of its obligations would have occurred, or the relevant losses or damages would have arisen, even if the Force Majeure Event had not occurred. As soon as reasonably practicable following the date of commencement of a Force Majeure Event, and within a reasonable time following the date of termination of a Force Majeure Event, any Party invoking it shall submit to the other Party reasonable proof of the nature of the Force Majeure Event and of its effect upon the performance of the Party’s obligations under this Agreement.”
What Does it Take to Invoke a Force Majeure Clause?
In the United States, courts interpret force majeure clauses very narrowly, relying almost exclusively on the way these clauses are written. If a party is seeking to avoid liability for non-performance of its contractual obligations, it is not enough for that party to simply say that performance is “impossible.” Rather, the party invoking the force majeure clause must demonstrate that several criteria have been met.
1. Does the Event Qualify as Force Majeure?
First, the party must be able to demonstrate that an event either (i) has made or (ii) will make performance of its contractual obligations impossible. Once this event is identified, the party must next ensure it is covered under the language of the agreement’s force majeure clause. If the event is not specifically covered but could arguably be covered under a general or catch-all provision of the force majeure clause, the party can choose to litigate the issue and have a court decide whether the event is covered.
For example, if a party is seeking to avoid liability for non-performance due to the novel coronavirus (COVID-19) pandemic but the only relevant portion of the force majeure clause is the general “acts of God” provision, it could ask the court to decide whether a pandemic qualifies as an act of God. This example again highlights the importance of drafting a force majeure clause that addresses all possible events that could trigger non-voluntary non-performance.
2. Was the Force Majeure Event Unforeseeable?
Next, assuming the event qualifies as force majeure, the party seeking to avoid liability must show that the event was unforeseeable. Unless the party seeking non-performance had insider knowledge that the event was coming or the parties entered into a contract while the event was occurring, this element of the analysis is usually relatively easy to satisfy.
Using the novel coronavirus (COVID-19) pandemic as an example, if the parties entered into their contract after the pandemic started, the element of foreseeability likely would not be met. When parties are negotiating a contract, they are expected to take into account current events and address them accordingly. So, if a party enters into a contract to provide catering services for a large conference during the pandemic, it could not argue that the impossibility of performance was unforeseeable since mandates prohibiting gatherings of large crowds were already in place. On the other hand, if this same catering contract was signed before the risk of the novel coronavirus spreading across the United States was known, the element of foreseeability would likely be met as neither party could have predicted a world health pandemic.
3. Did the Force Majeure Event Cause the Inability to Perform?
If a party is able to show that the force majeure event was unforeseeable, it must next show proof of causation between the event and the resulting non-performance. For example, if a domestic automotive manufacturer was supposed to produce cars for customers who had already purchased vehicles but the company did not receive certain auto parts from China due to novel coronavirus (COVID-19) pandemic, the manufacturer would likely be able to prove causation. However, manufacturer experienced issues with its assembly line due to mechanical or technical issues unrelated to the pandemic, then the pandemic would not excuse the manufacturer’s failure to perform.
Importantly, even if a party can show that a force majeure event caused its inability to perform, it still has a duty to mitigate the other party’s damages. Continuing the car production example from above, the manufacturer would need to attempt to mitigate the effects of the pandemic on its Chinese supplier, perhaps by seeking an alternate supplier, before it could seek to avoid liability entirely. If it can get the necessary parts from a different supplier, thereby still meeting its contractual obligations to its customers, then it must do so provided that this course of action does not create unreasonable burden involving extreme measures or a significant financial loss. What constitutes an “unreasonable” burden or “significant” loss would be a matter of interpretation for the parties to negotiate or the court to resolve in ensuing litigation.
4. Is it Truly Impossible to Perform?
The last element a party must prove in order to invoke force majeure is that the force majeure event is so severe that it renders performance of the party’s contractual obligations impossible. For example, if a concert venue was to host a performer for a series of shows scheduled during the COVID-19 outbreak, the venue could show impossibility of performance due to large crowd gathering restrictions instituted in order to fight the spread of the virus.
What if a Contract Does Not Have a Force Majeure Clause?
If a party is unable to meet its obligations under a contract that does not contain a force majeure clause (or under a contract with a force majeure clause that does not apply), then it must explore other alternatives. In some jurisdictions, one such alternative may be the “frustration of purpose” doctrine. Similar to force majeure, the frustration of purpose doctrine relieves parties of their contractual responsibilities when an unforeseeable event beyond parties’ control undermines the principal purpose of their agreement. Some jurisdictions have an “impossibility” doctrine as well; and, of course, the parties can always agree to negotiate concessions or alternate terms.
During the novel coronavirus (COVID-19) pandemic, many companies may find that this latter approach is the most desirable, as it can excuse the parties’ performance during the pandemic while still preserving their long-term relationship. In any case, companies that are facing contractual performance or liability issues during the COVID-19 outbreak should address these issues proactively with the help of experienced legal counsel.
Contact the Commercial Contract Lawyers at Oberheiden P.C.
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