COVID-19 Impact on Contracts

COVID-19 has presented businesses in the United States and around the globe with unprecedented challenges in supply chain and business continuity and performance of contractual obligations. In this uncertain time, an often overlooked “boilerplate” contract provision may be key to understanding your rights and obligations under your business contracts: a force majeure clause. This information may be important to any business facing issues related to contract performance – whether it involves another party’s ability to perform its contractual obligations or your own ability to perform under any of your contracts. This could include important business contracts such as leases, supply agreements, or services agreements.

WHAT YOU NEED TO KNOW

• What is force majeure?
• Is a force majeure clause in your contract and what does it mean?
• How can performance be suspended under my contract?
• What if there is no force majeure clause?

What is force majeure?

Many business contracts contain force majeure or other similar provisions that may support the claim by one party to postpone or modify its performance obligations to the other party under the contract. A force majeure typically means “an event or effect that can be neither anticipated nor controlled.” Depending on the exact language in the contract (see below), force majeure events may include natural disasters, national emergencies, strikes, shortages, government orders, epidemics, or pandemics. When the conditions in the clause are met, a party’s performance under the contract may be suspended or delayed because the circumstances that prevented performance were beyond its reasonable control or unforeseeable at the time the parties entered into the contract.

Please note that not all contracts will use the phrase “force majeure;” instead, there may be provisions that operate in the same manner, but use different terms such as “events beyond the reasonable control of a party,” “Acts of God,” or similar terminology.

Is there a force majeure clause in my contract and what does it mean?

If your contract includes a force majeure clause, then the precise language of the contract will control whether and under what circumstances nonperformance is excused; some force majeure clauses contain an extensive list of events that qualify, while others are more restrictive and are limited to a few specific events. In other words, whether the contract’s force majeure clause applies to issues caused by the COVID-19 pandemic likely hinges on the exact language in the contract, and the exact language used in a force majeure provision varies greatly from contract to contract.

In our current environment, if the force majeure clause explicitly includes epidemics, pandemics, or government orders that specifically apply to one of the contract parties, then the affected parties’ obligations under the contract may be postponed or excused. If those types of events are not explicitly mentioned in the contract (or if the force majeure clause is ambiguous), then performance may still potentially be excused based on the facts and circumstances of each individual situation.

How can performance be suspended under my contract?

The force majeure clause also may include notice, duration, and mitigation requirements that must be met or followed to excuse nonperformance. Further, the extended nonperformance may apply to some, but not all, of your obligations under the contract. It is critical to read the clause carefully to understand each party’s obligations to be sure the necessary steps are taken and documented. For example, we have seen a number of contracts that require a party intending to rely on the relief afforded by these provisions to provide the other party with 10-15 days’ notice of the occurrence of the event constituting “force majeure.”

Before performance is excused or can be postponed, the affected party will probably need to be prepared to demonstrate that its financial position has been dramatically impacted by the event in question, and that it has taken reasonable steps to avoid or mitigate the negative impact from the virus.

Alternatively, consider if the delay or disruption could be addressed through negotiations with the other party rather than a formal invocation of force majeure rights. You should consult with an attorney prior to initiating such discussions to ensure that you are not inadvertently waiving critical rights or harming your ability to seek recourse, should amicable resolution not be possible.

What if there is no force majeure clause?

If recent events and disruptions have made performance under the contract extremely difficult or impossible, then common law doctrines of impossibility or impracticability may still apply to afford you some relief.

Whether these doctrines apply will depend on the type of contract, the precise language in the contract, and the state law that governs the contract.

Key Takeaways and Action Items

In order to get your arms around this issue, our recommendations are as follows:

1. Review your material business contracts carefully and as soon as reasonably possible to identify those that have force majeure or other similar provisions.
2. Identify any language that appears to be specifically “on point” with respect to the COVID-19 crisis, especially if there are any explicit mentions of “epidemics,” “pandemics,” or “disease.”  That is the strongest language that would excuse performance under the contract, but the absence of these specific types of events does not necessarily mean that the affected party is precluded from claiming relief based upon a force majeure event.
3. Pay close attention to any notice provisions or other procedural requirements that must be followed in order to take advantage of the relief provided by these types of clauses.  If a party fails to provide timely notice, some of the provisions state that the rights will be deemed to have been waived.
4. Please be aware that, even if the contract has a force majeure provision, it will not automatically excuse performance by the affected party.  We do not recommend unilaterally ceasing performance under any contract before carefully reviewing the specific terms of the contract and seeking advice on its legal implications.