The coronavirus (COVID-19) is disrupting business at all levels and on a global scale. While this pandemic is evolving on a daily basis, there are some things that companies can and should be doing in order to be proactive in responding to potential impacts from COVID-19. This update focuses on the implications of COVID-19 under a force majeure provision of a contract and the considerations that companies should be aware of as they navigate through this unprecedented time.
Although rarely invoked, many contracts contain what is known as a “force majeure” clause. Depending on its language, a force majeure clause relieves a party of their contractual obligations when performance becomes impossible or impracticable, due to an event or effect that the parties could not have anticipated or controlled, or at least excuses a delayed or impaired performance.
Force majeure clauses are generally considered boilerplate provisions that apply to time-specific events, such as fires, earthquakes, hurricanes, etc., that literally prevent the ability to conduct business. Some states also allow for the termination of a contract for an undefined act of God, and it remains a question as to whether a pandemic is an act of God.
While force majeure clauses have been evoked over the past few decades, for the first time in recent history, force majeure clauses suddenly have meaning. Because each contract’s force majeure clause may utilize different language, they are subject to interpretation. The relief available under the force majeure clause will also vary and be dependent on the exact language used in the contract. For example, some contracts may excuse performance altogether while others allow for an extension of time to complete performance.
It is important to note that not all emergencies will constitute an excuse for non-performance. Courts generally construe force majeure clauses very narrowly and whether the effects of COVID-19 may act to excuse a party’s performance will depend on the language of the provision in question. It is generally not enough that a party’s performance has been made more difficult or financially burdensome.
Is COVID-19 Covered by Your Force Majeure Clause?
As noted above, it is not a given that the impact of COVID-19 will excuse or delay a party’s performance under a force majeure clause. Force majeure clauses will likely be interpreted by the courts if the clauses are ambiguous and the parties do not agree upon the scope of the clause. However, below are a few examples of force majeure language that may provide a party relief depending upon the precise language of the specific clause:
- If the contract expressly defines force majeure to include things like “outbreak,” “disease,” “epidemic,” “pandemic” or other related terms, disruption to a party’s performance based on COVID-19 may be excused under the terms of such a force majeure clause. Such language, however, is not often seen in force majeure clauses.
- If the contract includes an “act of government” as a force majeure event, then government action, and possibly even a government’s declaration of a State of Emergency, taken in response to the pandemic may excuse a party’s non-performance. For example, this may include an instance where a party is unable to obtain a building permit from the local authorities due to some government counteraction in response to COVID-19. Unfortunately, government action is generally identified as things like condemnation, changes in law or ordinances, etc., that make the existence of a business or its physical location impossible. However, under the current circumstances certain government action may be deemed to constitute a force majeure.
- Some force majeure clauses may include broad catchall phrases like “act of God” or “emergency.” As most courts are reluctant to give broad interpretation to force majeure provisions, a party invoking the clause based on only this language will have an uphill battle.
Ultimately, determining whether the force majeure provision is implicated under these circumstances will depend, not only on the language of the provision itself, but also upon the particular facts relating to the alleged inability to perform (i.e. is there a causal link between the event and the non-performance) as well as governing law applicable to the contract.
Force Majeure Clauses in Related Contracts
Many business relationships involve multiple contracts with various parties relating to the same subject matter. In those circumstances, it will be important to verify the existence and exact language of any force majeure clauses in each agreement and identify any potential conflicts in obligations. For example, in the construction loan context, there will likely be a construction contract between a developer and contractor outlining, among other things, the deadline for completion of construction. There may also be a construction loan agreement between the developer and lender which also includes a deadline for completion of construction. In this example, the developer could face inconsistent obligations if one contract clearly included pandemics as an excuse for non-performance while the other contract did not or was less clear on whether COVID-19 was a covered event.
Next Steps for Companies
Now is the time to review existing contracts for specific force majeure language. Even if the parties have not yet experienced any disruption to contractual performance due to COVID-19, it will be in both parties’ best interests to be alert and identify any potential issues that could arise. This will also allow you to take any steps that may be available to minimize the effect of a future disruption.
If disruption to performance has already occurred or is imminent, be aware of the notice requirements involved for invoking the force majeure clause. Many contracts require strict compliance with notice provisions and timing requirements. Failure to adhere may preclude a party from the protection of the force majeure clause.
If you have any questions about this legal update or any other COVID-19 related issue, please reach out to the authors of this update or your MMM attorney.