With COVID-19 impacting companies of every size, force majeure clauses are more important than ever. A force majeure is an event that prevents a party from fulfilling its contractual obligations. It can be natural or person-made so long as the event itself could not have been anticipated or controlled by the parties to a contract.
Force majeure clauses will likely be enforced. Some contracts include an explicit force majeure clause, which excuses performance if an event specified in the clause occurs. The more extensive the list of qualifying events, the less likely that a court will enforce a non-listed event as a force majeure, especially if the event was foreseeable at the time of the contract.
When a contract lacks a force majeure clause, or it is limited to one party or circumstance, contracting parties might still be able to invoke other legal doctrines to excuse performance impacted by unforeseen events.
Depending on the language used, the COVID-19 pandemic could be a basis to excuse performance under a contract. For example, a force majeure clause that explicitly covers pandemics or other contagions would likely justify suspension or termination of a contract.
Even when there is no express contractual language referencing pandemics, a party may still be able to suspend or terminate a contract. Historically, there have been instances where the courts found that natural phenomena, such as the outbreak of a contagious disease, qualify as force majeure events that excuse contractual performance even in the absence of any explicit references in a force majeure clause.
The existence of a pandemic alone may not excuse contractual performance. If the novel coronavirus itself does not prevent performance, the force majeure clause alone might not justify terminating a contract. For example, a party whose contract requires in-person performance may be able to terminate a contract if they test positive for COVID-19, but a personal preference not to perform because of increased risk may not be sufficient.
Recent governmental orders may also qualify as force majeure events. Whether performance is excused will depend on the business and order involved. Essential businesses may face increased difficulty in justifying suspended contracts if they are able to operate in any capacity. In addition, social distancing recommendations, as opposed to mandatory orders, may not be sufficient to excuse performance, even if those recommendations result in increased expense.
Global supply chain interruptions may constitute another basis for suspending or excusing contractual performance. However, parties likely cannot argue that the recent market downturn excuses performance because changes to economic conditions are generally considered foreseeable circumstances outside the scope of most force majeure clauses.
The timing of contracts will also impact whether the parties can successfully argue that COVID-19 excuses performance. For parties who entered into a contract in 2019 or earlier, COVID-19 was arguably unforeseeable. In contrast, parties who entered into those same contracts in 2020 are far less likely to successfully wield a force majeure clause as a shield that excuses their performance.
Whether performance is suspended or terminated depends on many factors, but the following considerations are important to address obligations impacted by COVID-19:
Determine whether there is a force majeure clause and if so, which events are included.
Evaluate whether any inability to perform is tied to a potential force majeure event.
If performance has been impacted, attempt to find alternative means of performing or reach an agreement regarding extensions.
Keep detailed records about how performance has been impacted.
Since every situation is unique, we recommend consulting with counsel to assess the best possible approach.
Miles J. Feldman is Founding Partner and Camilla Chan is Partner at Raines Feldman LLP. For more information, visit raineslaw.com
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