Business Interruption and Contractual Nonperformance: Force Majeure
As countries around the world respond to the arising threat posed by the coronavirus (COVID-19) pandemic, businesses are finding their operations interrupted due to a number of reasons, such as personnel shortages, supply chain disruptions or governmental orders (e.g., closing borders and shelter-in-place orders). Businesses faced with these interruptions are contemplating whether they can continue to meet their obligations under their contracts and what to do if they cannot.
For businesses facing a situation where its performance under a contract may be delayed or it may not be able to perform at all, there are a few potential avenues that can provide a defense for its delay in performance or nonperformance. Discussed below is force majeure clauses. You can also read our posts on defenses based on Article 2 of the Uniform Commercial Code and defenses based on common law principles of “frustration,” “impracticability” and “impossibility.”
An often-overshadowed provision in contracts – the force majeure clause – is coming into the limelight in these circumstances. Many contracts contain a force majeure clause which serves to excuse or permit a delay in performance or nonperformance upon the occurrence of certain unforeseeable events. Generally, force majeure provisions contain a list of events enumerating circumstances when a delay of performance or nonperformance would be excused such as: flood; fire; acts of terrorism or public enemy; and actions or omissions by any government authority. A force majeure clause may also include vague descriptions of events such as: acts of God, other events beyond the control of the parties or other similar language.
It can be relatively easy to determine whether the particular circumstance facing a business meets the definition of a specifically enumerated event in the force majeure clause. For example, if a government shuts down its borders and a business cannot export its goods to its buyers, this would clearly fall under acts or omissions by any government authority. On the other hand, determining whether the occurrence could be considered under a vague term such as an “act of God” or “other events beyond the control of the parties” could require a study of the case law of the jurisdiction the laws of which govern the contract. Some jurisdictions may interpret the clause strictly, refusing to excuse performance unless the occurrence is specifically listed in the clause, or interpret vague language, such as “other similar causes” to refer only to events of a similar nature to those specifically listed.
Force majeure clauses often contain requirements that need to be complied with in order to be enforceable. Many force majeure clauses contain notice provisions wherein the party seeking to be excused must notify the counterparty within a certain period of becoming aware of the occurrence. Force majeure clauses can also require the party seeking to be excused to mitigate the impact of delay or nonperformance or perform to the extent possible.
Additionally, invoking the force majeure clause to excuse a delay or nonperformance can have other impacts. Force majeure clauses can entitle the counterparty to seek fulfillment from third parties. This can impact exclusivity, licensing rights and confidentiality. Force majeure clauses may also entitle counterparties to terminate the contract if the delay in performance or nonperformance is significant or the expected circumstances continue for a significant or specified length of time.
COVID-19 and Its Impacts
Whether COVID-19 could trigger force majeure clauses to excuse performance may depend on the type of contract, the language of any force majeure clauses contained in the contract and the state law that governs the contract. If the force majeure clause specifically states that performance can be excused in case of pandemics, outbreaks, diseases or actions by governmental authorities, it provides some certainty that non-performance will most likely be excused. However, in lieu of such specific language, it is less certain if COVID-19 would meet the definitions of more generic language such as “Acts of God” or emergencies. The case law of the state whose laws govern the contract may provide some guidance. Additionally, as litigation arising out of the pandemic is decided by the courts and legislation is passed by state legislatures surrounding COVID-19 relief, more guidance may become available.
With increasing restrictions on business and populations as countries wrestle with the pandemic, it is uncertain what the impact of COVID-19 will ultimately be. If you believe you or your business may be impacted by the disruptions caused by the pandemic such that performance may be delayed or not possible, you should carefully review your contracts paying attention to any provisions related to performance and suspension of performance, force majeure and termination.
Author: Mayukh Sircar
The blog content should not be construed as legal advice.