By Sonam Chandwani, KS Legal & Associates
The novel coronavirus (COVID-19) is now a global pandemic. Numerous deaths are reported worldwide but the catastrophic consequences are on the rise. Cancellation of flights, shutdown of public places, and remote offices has caused unprecedented disruption to businesses across the globe.
Our preliminary concerns would revolve around the health and safety of our loved ones, employees, customers, and neighbors. But when the dust settles, business leaders from the C-suite to owners of convenience stores would be left wondering: How will this affect my business contracts? The answer to which is particularly important for small and medium businesses – who may not have a robust cash flow or necessary resources to deal with such a crisis.
As a result of this outbreak, several companies are examining their contracts to understand the extent of their rights, remedies and obligations with respect to their business associates. Suppliers of goods and services unable to deliver on contractual obligations are looking to see what provisions, if any, may protect them from a default. One such provision of particular concern is the – “Force Majeure” Clause.
What is the “Force Majeure” Clause?
Fundamentally, a force majeure event is an unforeseen or unavoidable event beyond the reasonable control of the parties to an agreement that serves as an excuse or delay in the affected party’s performance of its obligations under the agreement. Common force majeure events include floods, fires, earthquakes, wars, terrorist attacks, and government orders. But this is not an exhaustive list of events and there lies the problem.
The force majeure clause excuses non-performance of contractual obligations for events specified under the clause. But if an event not specified under the force majeure provision occurs, then the impacted party may not be excused from performance. Simply put, if the impacted party is unable to perform, it is likely in breach of the contract.
If the contract does not specify events such as “epidemics and quarantines” or “pandemics” in its force majeure clause, a party may have a difficult time claiming they are excused from contractual obligations because the COVID-19 has rendered a party unable to perform the contractual duties. But, is their failure to perform excused under the force majeure clause? Ultimately, it comes down to what the contract says and how a court of law interprets the clause.
Challenges in the “Force Majeure” defense
Part of the challenge lies with the fact that there is no universal standard definition for force majeure, and they often vary across agreement types and industries. The performance of one party might be completely excused by one force majeure provision, while under another, the contract might defer performance of the obligation until the force majeure event ceases, and yet another may require strict performance of the obligations or face penalty.
So when public health crisis or pandemic events such as the current COVID-19 outbreak are not explicitly included in the agreements – as is most commonly observed – creative arguments and legal advocacy will be critical in creating the best interpretation of the provision to support a force majeure defense.
Ultimately, and most importantly, the issue depends on an assessment of all of:
- the nature and context of your particular contract;
- the words in the relevant force majeure clause; and
- the general terms of the contract, including the substantive law / governing law clause.
To assess a business’ rights, obligations, and remedies, whether the business is the party unable to perform or such counterparty, the following should be considered:
- What contract provisions are relevant? Determine whether the contract includes a force majeure provision, and whether there any other relevant provisions to assess. Contractual provisions to review include any breach, termination, cancellation, or repudiation terms that may be applicable under the circumstances.
- How does the contract define a force majeure event? Is the provision broadly written? Assess whether the outbreak of the coronavirus, or the efforts to contain it, constitute a force majeure event under the contract. Examples of relevant language that may be included are “disease,” “epidemic,” “pandemic,” “quarantine,” or “acts of government.” Depending on the parties’ prior negotiation and drafting, a contract may either explicitly list all qualifying events, or generally define a force majeure event as an event beyond the parties’ control, leaving more room for interpretation. Broad, catch-all language may be interpreted differently depending on the applicable law.
- Is the coronavirus outbreak the cause of the party’s nonperformance? Consider whether the party could have timely performed if the outbreak did not occur. If other factors contributed to the party’s nonperformance, a force majeure clause may not be applicable. For example, to the extent a company takes proactive steps to avoid further spread of the coronavirus, e.g., by advising workers to stay home, does the resulting inability to perform constitute a force majeure event?
Practical Tips
Here are some brief tips in dealing with COVID-19 relative to contracts:
- Carefully review your contracts to determine your rights and obligations under these agreements, as well as any risks associated with the consequences and potential for recovery of additional costs or a price adjustment as a result of a work delay or stoppage.
- Contractors should also carefully review their subcontracts to determine their rights, obligations and potential for recovery.
- If a long list of force majeure events is included, it is likely to be helpful (where you are seeking to rely on the clause) if pertinent wording is included such as “pandemic”, “epidemic”, “outbreak”, “crisis” or “governmental action”.
- Watch out for wording in new contracts that requires that the event of force majeure is “unforeseeable”.
- Communicate and properly document the incurrence of such additional costs to include any potential mitigation of such costs. The point here is to document, document, document and communicate, communicate, communicate.
