Businesses across the world are feeling the impact of the COVID-19 pandemic and the drastic measures that are being taken to contain the virus. The COVID-19 pandemic has led to business reductions, plant closures, music concert cancellations, unprecedented travel disruption and other cancellations that are announced daily. COVID-19 is affecting business and consumer behavior on a massive scale, which has affected the ability of many businesses to operate and meet their contractual obligations. As the impact of COVID-19 pandemic continues to grow, parties to contracts are evaluating their contractual obligations and reviewing their contracts to determine if the COVID-19 pandemic will excuse non-performance.
Most commercial contracts contain a force majeure clause. Force majeure clauses are commonplace in supply contracts, loan agreements, leases, and construction contracts. A force majeure clause in a contract deals with unexpected and reasonably unforeseeable situations that could affect either parties’ ability to meet their contractual obligations, steps the party invoking the force majeure clause must take, as well as the legal consequences in the event of a force majeure event. In the coming days, weeks and months, many parties will be reviewing and attempting to enforce these force majeure clauses. However, the fact that a contract contains a force majeure clause does not necessarily mean any relief will be invoked as a result of impacts to a company’s business from the COVID-19 pandemic. Whether the COVID-19 pandemic will constitute a “force majeure event” is a matter of contract interpretation that requires legal advice.
When U.S. Courts analyze a force majeure clause to determine if it applies, the Courts will look to: 1) the precise language of the clause: 2) evidence that the force majeure event was unforeseeable; 3) whether the party’s inability to perform, or delay in performing, is related to the force majeure event; and 4) evidence that the effects of the force majeure event are so severe that the contract obligations cannot be performed. Some contracts will define what is considered a “force majeure” event; if so, that definition will govern. While most prior contracts probably do not include “coronavirus” in their force majeure clauses, common definitions include natural disasters, “acts of God,” acts of government or “other circumstances beyond the parties’ control.” While less common, some force majeure clauses may list pandemics, epidemics, or a broader definition of “disease.” The COVID-19 pandemic is not likely to be considered an “Act of God,” given that most of the impact that businesses are experiencing are a result of measures taken by the government. However, some force majeure clauses may extend to actions taken by governments. Actions taken by governments could be construed to include the mandatory quarantines, mandatory bar, restaurant and gym closures, or travel restrictions that prohibit businesses from transporting goods or allowing their employees to travel. If the COVID-19 virus continues to spread and more severe government regulations and actions are implemented to attempt to contain the virus, there is a likelihood that force majeure clauses will become more enforceable.
The occurrence of a force majeure event, by itself, may not be sufficient to enforce a force majeure clause. To enforce a force majeure clause, a party must also establish that the force majeure event caused an inability to perform the contract obligation, as increased costs alone often will not be sufficient to prevail on a claim of force majeure. As many companies begin to implement work from home policies and telephonic and video meeting capabilities, these courses of action will be considered in determining whether performance was actually impossible. Because force majeure clauses are so fact specific, if either party is attempting to enforce the clause, you should have an attorney review the contract to determine if the party attempting to invoke the clause is entitled to any relief, and if so, to what extent. Some clauses may provide for complete or partial relief, others may provide for a modification of the timeline of the contract. For example, force majeure clauses contained in commercial leases may provide additional time to meet obligations or deadlines under the lease other than financial obligations (e.g. the tenant is still obligated to pay rent despite a force majeure event, however a landlord’s obligations under the lease may be delayed). Also, parties need to be cognizant of any notice provisions under the contract as well as other obligations such as mitigating damages should the virus interfere with business expectancy. Failing to abide by the notice requirements is a common reasons courts find a force majeure defense fails. For example, some contracts require a party claiming force majeure to provide written notice as soon as possible or “without delay”. Other contracts may require the party invoking force majeure must provide at least 30 days’ notice. Therefore, parties should consider whether notifying the other party early is a better strategy. Some contracts also provide that the force majeure event must be in existence for a certain amount of time before a party can invoke force majeure. For example, a contract may provide that a party is only entitled to terminate the contract if the force majeure has been existence for a period of 90 days or longer. Businesses should continue to monitor the situation because the facts and circumstances surrounding the virus change quickly and daily. While the circumstances today may not trigger the enforcement of a force majeure clause today, they may in the future.
Businesses should also review their insurance options. In some cases, business interruption insurance may provide businesses with some relief. Businesses should have the terms of their policies reviewed to determine if the COVID-19 virus meets the definition of a triggering event. The COVID-19 pandemic is having a considerable economic impact on both businesses and employers. We suggest that if you have any questions about your contracts, including enforcement of a force majeure clause, you consult with an attorney to discuss your rights.
The information in this article is for informational purposes only and does not constitute formal, legal advice. If you have any questions regarding the information contained in this article, please consult with Danielle McKinley at (312) 251-2292 or any attorney at RM Partners Law LLC for advice about your particular circumstance.