As the world adjust to the outbreak of the new COVID-19 virus, businesses and individuals have been and will continue to be impacted. From production to performance, many companies have become unable to fulfill contractual obligations, as a result of supply shortage, city closures, and lack of labor due to safety precautions. As such, these companies are left wondering what legal remedies and recourse they have with respect to business affiliates.
As with any contractual manner, it is going to come down to what was contracted and mutually agreed upon by both parties. In this instance, we have to put the spotlight on the contract’s force majeure clause. A force majeure clause excuses one or both parties for nonperformance under a contract when certain events, as detailed within the clause, occur. These events are often outside of the party’s control and severely impact their ability to meet the terms of the agreement. Many businesses have asserted that COVID-19 has impacted their ability fulfill their contractually obligations, and as such they should be absolved of any financial or legal responsibility. While business may be restricted because of this global health crisis, a pandemic does not automatically give rise to a valid force majeure defense under every contract and every circumstance.
To determine a business’ rights, obligations, and remedies, when they are unable to perform or meet the terms of an agreement the non-conforming party should consider the following:
Has there been a Force Majeure Event under the terms of their contract?
To determine contractual intent and if an force majeure event has occurred, first look at the specific list of events that are included within the clause that would release a party from their responsibility. Although each clause should be tailored to fit the specific purpose of the contract, most clauses include an act of God as a force majeure event. Many would think that a global pandemic would fall under this category, but that is arguable because of the varying definitions by jurisdiction and the principle of sole causation. The act of God reference as it relates to a viral pandemic is different from other occurrences, such as flood, because here the parties have to determine if it is the virus itself that precluded performance or people’s response to the virus that precluded performance. Whereas, when there is a flood and a facility is now damaged or roads are not drivable, that is a clear act of God where the flood is in fact the sole cause for lack of performance. The act of God provision may cover this instance, but it is always best to have an event specifically included. Having a clause that explicitly references epidemics or pandemics would be most beneficial. However, prior to COVID-19 this event was rarely included in contracts outside of the health industry. Other events that may be listed and at play as a result of COVID-19 are government order or authority (i.e. A mayor implementing a Stay Home Order) and national or regional emergency.
Furthermore, many force majeure clauses include a catch-all provision. However, the catch all provisions are only applicable for unforeseeable events and those that are similar in kind to the other events included in the clause. For example, if the list includes “riots, fire, strike, and any other event” , the “any other event” would not extend to government order or pandemic outbreak, because they are not like in kind to the examples provided. “Other events” cannot be greater or superior in quality, or different than the specifically detailed terms within the clause.
However, even if your contract does not specifically include these events or a force majeure clause there may be some recourse for nonperformance. Outside of force majeure we may see companies finding remedies based on the underlying doctrine of frustration of purpose, impossibility, and commercial impracticability. If not included in the contract itself these principles may be implied and applicable under applicable state contract law.
When do you invoke the force majeure clause?
Many contracts with a force majeure clause will include some level of interference that a party must experience before invoking the impact of the force majeure under the terms of the agreement. Guidance on when to invoke the clause varies across contracts, but again first start with what the contract actually says. Some common points of invoking are when the party is prevented or hindered from complying, or when the act becomes:
- Impracticable; or
- Not reasonably possible.
There are many factual considerations that drive this analysis and its applicability. One must assess what their obligations are and to what degree, if any, they can they reasonably comply. For example, if you have a planned event with attendees of more than 10 people, that may now be illegal, as well as not reasonably possible, based on recent governmental authority and order. Yes, you could still have the event for just 10 people, but that would not be reasonable and pulls on the underlying doctrine of frustration of purpose.
Is notice required?
As with all other terms of the contract, the notice requirement of a force majeure is going to vary depending on what was contracted. This notice alerts the other party of your nonperformance and why. Failure to give notice as instructed could negate a party’s right to assert a force majeure defense for failure to comply with the terms of the contract.
Some common provisions concerning proper notice include:
- Within “x” days of an event of force majeure;
- Reasonably prompt;
- As soon as practicable; and
These different formulations of notice are significant as they connect to a business’ legal strategy, what event led to the party claiming force majeure, and when did that event start. As this relates to COVID-19 there are many recent events that could give rise to a force majeure event. Such events for considerations include, the travel ban, restrictions on gatherings of more than ten people, statewide emergency, or other event. It is important for a business to understand its legal rights and implications when asserting the event of force majeure, proceeding with notice within the proper timeframe, and then canceling with any other affected parties. This sequence of events matters to curtail any counter defense that may arise to negate that the alleged force majeure is not in fact the actual reason for nonperformance.
Force majeure clauses do provide some contractual relief for parties that are unable to perform. However, it is important to clearly define the event of force majeure, invoke it timely, and provide proper notice. Furthermore, if a contract does not have a force majeure clause there are other options of recourse, but still communicate with the other party and provide notice for any inability to perform. It is likely that this global health crisis will impact the judicial analysis of force majeure clauses. Going forward the law and contracts will be written with COVID-19 as hindsight 20/20. But for those with current contractual obligations it is important to stay abreast of your legal rights and remedies. If you are unable to perform contractual obligations, please review your contract for possible relief and act timely. Mitigate damage if you can and consult with an attorney as soon as possible to ensure that your rights are protected, and remedies properly executed.
The Curry Law Firm LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.
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