Bulletins

The effects of the COVID-19 pandemic are rapidly becoming ubiquitous; reaching nearly all corners of the globe and impacting all facets of daily life. With commerce grinding to a near halt—particularly in those regions subject to mounting government restrictions on business operations, public gatherings, and travel—contracting parties are facing uncertainty about the feasibility of satisfying their contractual obligations. From a legal perspective, the upshot is likely to be a significant increase in litigation stemming from parties’ attempts to obtain relief from their performance obligations.

In these scenarios, the party seeking to avoid performance will likely look in the first instance to the contract itself to determine whether it includes a force majeure clause, and, if so, whether the clause’s language applies to excuse performance under current circumstances. If not, parties may turn alternatively to common law contract-defense doctrines, which may otherwise excuse performance in the absence of applicable force majeure language.

The Fundamentals of Force Majeure. The term force majeure translates literally from French to “superior force.” Force majeure clauses operate to excuse or defer contractual performance obligations upon the occurrence of certain extraordinary events or circumstances beyond the contracting parties’ control. In practice, force majeure clauses are rarely invoked, and even less so successfully because courts construe them extremely narrowly by their terms. If a given contract does not contain the explicit section heading or title “force majeure,” look elsewhere in the contract. Occasionally force majeure provisions or analogous language can be found within other sections that address the parties’ performance obligations or grounds for excusable delay.

Force Majeure Analysis is Highly Fact Specific. Determining whether the COVID-19 pandemic will trigger a given force majeure provision and excuse contractual performance involves a highly fact-dependent analysis. Outcomes may differ markedly depending on:
– the clause’s express contractual language;
– the precise nature of the intervening force or event;
– what the parties do in response to the intervening force or event; and
– the nuances of contract interpretation and enforcement jurisdiction to jurisdiction.

As a consequence, parties should closely evaluate the precise language or their contract’s force majeure terms when trying to anticipate whether a court will enforce the clause in the context of COVID-19. It remains to be seen in the coming months and years as force majeure litigation becomes more prevalent whether courts will relax their notoriously narrow interpretations in favor of a more liberal approach.

Force Majeure Forms and Interpretations. Most garden variety force majeure clauses include a specific list of forces or events that upon their occurrence absolve the nonperforming party from liability for breach of contract. These lists are often tailored to or dictated by the type of contract at issue or the industry in which it arises. Commonly recited examples of force majeure events include, but are not limited to: fire, flood, earthquake, labor strike, riot or war. Other clauses, rather than include an enumerated list, simply contain general catch-all language contemplating “acts of God” or similar circumstances beyond the parties’ reasonable control. So-called “acts of God” typically refer to forces of nature (e.g., weather-related events, natural disasters, etc.), as opposed to events attributable to mankind (e.g., labor strikes, riots, wars, etc.).

Some force majeure clauses specifically identify public health-related terms like “pandemics,” “epidemics,” “viruses,” “plagues” or “quarantines.” If the parties are fortunate or unfortunate enough—depending on their objectives—to have a force majeure clause that includes public health-related language of this kind, chances are high that performance will be excused on the basis of the current pandemic. Indeed, the World Health Organization’s March 11, 2020 official declaration of COVID-19 as a global pandemic leaves little room for disagreement.

Similarly, if the force majeure clause includes specific language contemplating the occurrence of government “acts,” “orders” or “mandates,” then contractual performance is again likely to be excused given the proliferation of COVID-related shutdowns and “shelter in place” orders throughout the United States and abroad. These state and local restrictions have drastically curtailed, if not halted, companies’ normal business operations, thus rendering contractual performance impossible in many cases.

In cases where the force majeure clause at issue enumerates a comprehensive list of forces and events but fails to mention pandemics, plagues and the like, most courts will construe the list narrowly and consider any omissions purposeful. The analysis becomes more complicated in cases where the specifically identified list of forces or events is followed by a final catch-all phrase. In those cases, the general catch-all language will typically be interpreted to contemplate only similar forces or events, closely akin to those identified in the preceding list. Finally, where performance excusal is sought under a force majeure clause that contains only vague catch-all language standing on its own, the exercising party will inevitably point to the unprecedented nature, reach, and effects of the COVID-19 pandemic as grounds for its qualification as an extraordinary event outside the parties’ reasonable control.

There Is A High Bar to Invocation of Force Majeure. Even if a given force majeure clause is triggered by pandemics or similar language, performance may not be excused automatically on that basis alone. The party seeking relief should be prepared to demonstrate that it took affirmative steps to mitigate damages and also to show that performance is truly impossible due to the force majeure event. Most courts will excuse performance only when it has been made impossible as opposed to merely inconvenient, increasingly difficult or financially impracticable.

The proliferation of recent “shelter in place” orders and similar government-imposed shutdowns may, for example, render certain contractual performance legally impossible. In the absence of government mandates or similar circumstances evidencing legal impossibility, parties seeking relief from their obligations should undertake reasonably diligent efforts to overcome impediments to performance and to mitigate the impacts of nonperformance by, for example, sourcing substitute products, parts or materials.

Be Aware Of Notice Requirements! Force majeure clauses almost universally require the party invoking the clause to provide prompt notice to the counterparty. Compliance with notice requirements is not merely a matter of professional courtesy. Parties who suspend or defer performance without timely notice do so at their peril and risk waiving their rights. The exercising party must strictly adhere to the specific details of what the notice provision requires, both in terms of the notice’s substance and transmittal method. Companies should also be diligent about retaining all relevant records and evidence of business disruption in anticipation of potential disputes.

It may also be prudent for the exercising party to provide a brief explanation within the notice as to why performance is not possible, and to memorialize what steps it has undertaken or intends to undertake to mitigate the effects of nonperformance. Parties should mindful however of how they characterize the nature of the intervening force majeure event at this early stage (i.e., is it the pandemic itself or the resultant government-instituted mandate that renders performance impossible?) because causation issues may later arise during litigation if the force majure clause covers one event (e.g., government mandates), but not the other (e.g., pandemics).

Parties may also wish to initiate dialogue with their contractual counterparty as it becomes increasingly likely that the contract’s force majeure clause will be exercised. Open lines of communication not only demonstrates good faith but also increases the chances that the parties will reach some common ground and decide to reform (or rewrite) portions of their contract. Indeed, contract reformation or the negotiation of substitute performance may be more desirable for both parties than the discharge of performance altogether.

Alternatives to Force Majeure. If a given contract fails to include a force majeure clause, or if the clause exists but is not triggered by public health events like the COVID-19 pandemic, the performing party may still be excused from its contractual obligations by virtue of other non-contract based defenses, namely the common law doctrines of “impossibility,” “commercial impracticability” and “frustration of purpose.” We will address the scope and applicability of these common law alternatives in the next installment of this series.

View the full article on COVID Considerations here.