March 24, 2020 | by Wong Fleming
To our valued clients, partners, & community members:
As COVID-19 continues to affect the global community, our highest priorities are the well-being of our personnel and their families and meeting our clients’ legal needs. In connection with our interest in our community, Wong Fleming wants to provide the following information about some potential legal issues that are arising during this crisis. We will be sending more alerts out to you as this unprecedented conflict unfolds. One such issue is the potential of force majeure provisions being triggered in commercial contracts to excuse a party’s nonperformance.
On March 11, 2020, the World Health Organization declared that the coronavirus is a global health emergency. Since then, many companies have faced challenges fulfilling contractual obligations because of business disruptions caused by the coronavirus. These disruptions obviously impact business operations of companies in a very substantial way both here and around the world.
A “force majeure” clause (French for “superior force”) is a common clause in commercial contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties prevents one or both parties from performing and fulfilling their obligations under the contracts. Examples of force majeure trigger events include war, strike, riot, crime, plague, or an event described by the legal term “act of God”. In practice, most force majeure clauses do not excuse a party’s non-performance entirely, but only suspend it for the duration of the force majeure event.
In the absence of a force majeure clause, parties to a contract are left to the mercy of the narrow common law contract doctrines of “impracticability,” “frustration of purpose”, and “impossibility of performance,” which rarely result in excuse of performance. Most courts will look to the provision of the contract to control what is defined under the contract’s force majeure provision.
Many force majeure provisions contain broad language referencing an unforeseen event outside a party’s control. Typically, even if a force majeure provision contains specific provisions, there will be a catchall at the end. However, be aware of whether or not the jurisdiction governing your contract will invoke the rule of ejusdem generis, under which a court will not construe such a catchall to have its broadest meaning, but will rather narrowly interpret such a phrase to include only events or things of the same general nature of class as those specifically listed in the provision.
Specified Unforeseen Event
Some common bargained-for force majeure provisions reference specific unforeseen events such as the following:
- Outbreak of Disease
- Act of Government – A government directive (e.g., mandatory quarantines or travel restrictions) would likely trigger under this provision.
- Act of God – Generally, an “act of God” is considered to be either a natural disaster or weather event. Other examples may include hurricane, flood, earthquake, volcanic eruption, etc.
What Type of Performance is Excused?
Force majeure provisions excuse varying degrees of performance; therefore, whether or not the coronavirus can excuse performance will depend on the specific and identifiable language of a particular contract. The following types of performance are commonly excused by force majeure provisions:
- Nonperformance (in whole or in part): Nonperformance is likely broader than delay and would cover a scenario where a supplier cannot supply at all as well as a scenario where a supplier cannot meet other contractual requirements.
- Hinderance or Delays: Delay is arguably narrower because it will likely require the supplier to eventually comply with its contractual agreements. Therefore, delay does not excuse performance entirely.
Did the Coronavirus Cause the Nonperformance?
In order to invoke a force majeure clause, there must be a causal link between the force majeure event and the affected party’s failure to perform. That means that the coronavirus itself must have hindered performance as opposed to making performance more costly or time consuming. Given that standard, many force majeure provisions require that the party invoking them show that there are no alternative means for performing their obligations or that they have taken all reasonable steps to avoid the operation of the clause. The most typical force majeure provision that would apply to the Coronavirus would be a governmental decree to shut down. In other words, a contract does not have to list a pandemic, epidemic, or the Coronavirus for the force majeure provision to apply.
What if a Contract Does Not Have a Force Majeure Provision?
The lack of a force majeure provision does not necessarily mean that there are no grounds to excuse performance. There might be other legal defenses that would excuse performance.
- Impracticality or impossibility of performance: The law excuses performance that has been rendered legally impossible or commercially impracticable. A company could argue that, because of the coronavirus, performance under a contract is now impracticable and that the virus was unforeseen at the time it entered into the contract. Government regulations that prevent performance are often grounds for raising the defense of impracticality of performance.
- Frustration of purpose: The frustration of purpose defense excuses performance when, after an unforeseen event, a party’s principal purpose is substantially frustrated. A company could argue that the coronavirus renders a contract impossible to perform or radically changes the underlying purpose of the contract.
What Are My Next Steps?
Since companies are likely to see an increase in the number of force majeure notices and may want to send notices themselves, companies should consider following the next steps:
- Review your existing contracts:
- Do your existing contracts contain force majeure provisions?
- If yes, look to see whether it contains any broad or specific provisions under which COVID-19 may fall.
- Check other terms of the contract to determine whether another provision would apply to protect the parties.
- Do your existing contracts contain force majeure provisions?
- Contact your counter parties to begin having discussions about potential triggering of the provision and how to best mitigate any issues caused by COVID-19.
- Be sure to comply with any formal notice provisions under your contract.
- Consider whether alternatives are available to comply with contractual obligations.
- Check insurance agreements to see whether they will extend to the force majeure event.
- If non-performance or delay is at issue, make sure to keep detailed records of the circumstances and events surrounding said issues.
- If your contract does not contain a force majeure provision, conversations with your counterparties may still be productive, especially in circumstances where the principal purpose of any given contract may be frustrated or become impracticable due to the impacts of COVID-19.
With regard to any new contracts that your company may be completing or currently negotiating in the midst of COVID-19, consider the following:
- Since the contract would be entered into at a time when the potential risks of COVID-19 are well known, you may not be able to rely on a force majeure clause as an excuse for nonperformance. As such, other contract provisions should be considered in order to account for COVID-19’s impact on the performance of the contract.
Wong Fleming is here to answer any questions or concerns regarding your contracts that do or not contained force majeure provisions. Please do not hesitate to reach out to our offices and attorneys with any legal questions.
About Wong Fleming
Wong Fleming is a nationally recognized, AV-Rated law firm that represents Fortune 500 companies and other corporate clients in the areas of Commercial Law, Corporate Asset Recovery, Creditors’ Rights and Bankruptcy, Employment and Labor Law, Environmental, Insurance Defense and Coverage, Intellectual Property, Immigration, Real Estate, and Premises and Product Liability. The firm maintains offices in the District of Columbia, New Jersey, Pennsylvania, New York, Georgia, California, Illinois, Indiana, Michigan, Tennessee, Florida, Texas, Washington, Canada, Mexico, and Germany.