Client Alert: Is the COVID-19 Pandemic a Force Majeure Event?
The COVID-19 pandemic is causing businesses across the US to consider, many for the first time, the operation and effect of a mostly neglected provision in their contracts: the force majeure clause.
A force majeure clause allows a party to suspend or discontinue performance of its contractual obligations under specified circumstances. It may also limit a party’s liability. Often this clause is overlooked during contract negotiations as routine boilerplate, and covers generic events such as “disasters,” “acts of God,” “labor strikes,” “national emergencies,” or “circumstances beyond the control of the parties.” The question on the minds of many businesses now is whether the COVID-19 pandemic and the various workplace and other restrictions it has spawned qualifies as a force majeure event that will excuse a party’s performance of its contractual obligations in whole or in part. What follows is an introduction to the operation of force majeure clauses and how they may apply during the current COVID-19 public health emergency.
What constitutes a force majeure event in any particular circumstance depends first and foremost upon the terms of the parties’ contract. How the term is defined (what events are covered and/or excluded), who may exercise it, and under what circumstances — all subjects that may be covered in the parties’ agreement — are important threshold factors, as force majeure clauses are construed and applied narrowly by the courts. Not all contracts contain a force majeure clause, and in the absence of such a provision the courts will not imply one (note, however, that even in the absence of a force majeure clause other legal doctrines like impossibility of performance may be applicable, as discussed in a companion Client Alert here.)
Where a force majeure clause does not refer to a pandemic, epidemic, or similar circumstance as a basis for excusing performance (and many contracts do not contain such language), the question is whether more general phrases like “acts of God” and “events beyond the reasonable control of a party” may be construed to cover the downstream consequences of situation like the COVID-19 pandemic. The simple answer is “maybe,” as it requires both consideration of the contract’s terms as well as an analysis of the actual effects of the pandemic upon a party’s performance.
Impossibility of Performance vs. Mere Difficulty: if a party’s performance of a contract is simply rendered more difficult by an unforeseen situation like a pandemic, it likely will not qualify as a force majeure event to excuse performance altogether. On the other hand, if performance is rendered impossible, a stronger argument exists that the event is covered by the force majeure clause. Here again, the language in the contract can be crucial; where, for example, a manufacturer’s production is shut down by a government order prohibiting employees from working on site, making it impossible for the manufacturer to produce and deliver the goods it agreed to sell, a clause that specifically refers to “government act or regulation” will obviously provide a stronger foundation for claiming that performance is excused than will a clause that refers more generally to “unforeseen events.”
Linking the Force Majeure Event and Inability to Perform: there must be a link between the force majeure event and a party’s non-performance. For a business whose employees are able to work from home, the existence of a government mandate prohibiting employees from working on site will likely not qualify as a force majeure event. Likewise, if it can be shown that a party would not have performed regardless of the existence of the force majeure event, or is only using the existence of a force majeure event to avoid performance because the contract is no longer financially rewarding, performance will almost certainly not be excused.
Partial Performance: if a party is legitimately prevented from performing some but not all of its contractual obligations, a force majeure clause may be construed to excuse only so much of the performance as was actually impacted. Whether this is the case in any particular situation requires a careful consideration of all relevant facts. The important point is that a force majeure clause may excuse a portion of a party’s performance, but not necessarily all of it.
Suspension versus Termination of Performance: Even if a situation qualifies as a force majeure event under the parties’ contract, a question may arise as to whether that event entitles one or the other of the parties to terminate the contract, or whether instead performance is simply suspended until the force majeure event ends. There is no hard and fast rule in such a situation; the terms of the contract and all surrounding circumstances must be considered. As in the case of partial performance, a force majeure event may temporarily suspend a party’s contractual obligations, but it may not terminate them.
Notice and Mitigation: Any party seeking to take advantage of a force majeure clause should consult the terms of the contract concerning the requirements of giving notice to the other contracting party that a force majeure event as occurred. Some contracts contain detailed procedures and deadlines for such notice, and the courts have been known to require strict compliance with such provisions. Such a party should also take all reasonable and necessary steps to mitigate the effects of the force majeure event. The extent of the mitigation required is fact-specific and will depend on the language of the contract as well as the facts and applicable law.
The extent to which the COVID-19 pandemic and its effects constitute a qualifying force majeure event is extremely fact-specific and depends not only on the terms of the parties’ contract but on all of the facts and circumstances concerning its intended performance. We are likely to see considerable attention being given to force majeure clauses as the effects of the COVID-19 pandemic, and governments’ responses to it, continue to unfold. Please contact us to arrange a consultation to discuss your specific situation.