This article is authored by Senior Attorney Steve Schain.
Following its rapid spread, on March 11, 2020 the World Health Organization declared coronavirus (“COVID-19”) to be a pandemic thereby potentially voiding every commercial contract via “force majeure” provisions and the common law doctrine of frustration (“Frustration Doctrine”).
“Force majeure” events mirror “Acts of God” like floods that are outside of parties’ control and relieve them from performing contractual obligations. Although most contracts contain “force majeure provisions”, these clauses range in scope and severity and often hinge on how invoked.
Over ensuing weeks, knowing how to properly make and respond to a force majeure claim may determine whether a business is able to survive this pandemic.
What Is a Force Majeure
“Force majeure” is the occurrence of an event which is outside of the parties’ reasonable control and prevents a party from performing its obligations under a contract. A party affected by a force majeure event is relieved from performing its duties for event’s duration and to the extent it is affected. Each force majeure provision must be analyzed on its precise language and context and the ability to obtain relief depends upon contract’s terms and not specific “force majeure”.
To qualify as a force majeure: (1) event must be beyond affected party’s reasonable control; (2) event must prevent, impede or hinder affected party’s ability to perform its contractual obligations; and (3) affected party must have taken all reasonable steps to avoid or mitigate event or its consequences.
Force majeure events take two forms: (1) “natural” involving physical risks that might impact a business or a project; and (2) political involving risks created by political or legal environment changes. Each category provides different remedies like agreement termination following a natural force majeure versus time extension and increased costs for a political force majeure.
Many contractual provisions expressly list events deemed beyond parties’ control like “pandemics,” “epidemics,” or “diseases.” If the provision does not include a specified list encompassing COVID-19 circumstances or its impact, considering whether the event falls under a catch-all provision is necessary, although, it is the impact of COVID-19 upon the affected party’s ability to fulfill its contractual obligations, and not the actual virus, that is relevant.
Force majeure provisions relieve a party from what would otherwise be a breach of contract, i.e., failure to fulfill contractual duty, and critical to triggering protection is degree of impairment to party’s ability to perform contractual obligations. The party must establish the causal link between the event and its inability to perform, and a provision requiring a party to be “prevented” by the force majeure will be more difficult to demonstrate than merely requiring being “impeded” or “hindered” in obligations’ performance.
COVID-19’s initial “force majeure impact” took the form of “inability to perform contractual duties due to workplace self-isolation. Under most clauses, and subject to affected party having taken all reasonable measures, this forms sufficient impact and causal link to qualify as a force majeure event. Conversely, a disruption merely impacting a contract’s profitability, economic downturn, other general adverse business conditions is insufficient so support a force majeure claim even if it is COVID-19 triggered.
A party seeking to rely upon a force majeure provision must demonstrate that: (1) it has taken reasonable steps to avoid or mitigate event and event’s consequence; and (2) there are no alternate means for performing under the contract. What constitutes a reasonable mitigation measure is fact-specific and depends upon both contract’s subject matter and language and force majeure event’s context.
Unlike other potential force majeure events, COVID-19’s continued global business impact both offers fewer mitigation measures and requires employers to follow relevant official guidelines and consider all reasonable measures to contain workplace spread.
Triggering a force majeure provision’s relief also requires providing the other party with evidence-supported-notice (including anticipated consequences and event’s duration) within a specified time period from when affected party first became aware of event’s occurrence.
Unlike a one-off event such as natural disaster, which is usually limited in time and confined to a particular geographical locale, the COVID-19 outbreak has been proliferating rapidly across multiple countries and has lead parties to issue “rolling” force majeure notices integrating COVID-19 outbreak’s developing impact upon their contractual obligations’ performance.
A force majeure clause’s invocation hinges on affected party’s contractual obligations, and the provision’s consequences and remedies range from extension of time to perform, contractual performance suspension for event’s duration, and contract termination.
Frustration Doctrine’s Impact
In the absence of an express force majeure provision, parties may invoke the Frustration Doctrine which applies if: (1) the underlying event is not the fault of any party to the contract; (2) the event or circumstance occurs after contract formation and was not foreseen by parties; and (3) it becomes physically or commercially impossible to fulfill the contract or transforms duties into a radically different obligation from what parties had anticipated. The Frustration Doctrine results in the contract automatically ending and releases parties from having perform future obligations. Because it requires showing that the duties impacted by the event are fundamental to the contract, and imposes more severe consequences, the threshold for establishing frustration is higher than that for force majeure.
Some contracts also contain a “change in law” provision addressing whereby a change in law makes it impossible for party to perform its contractual obligations. As a result, parties may incur increased costs to reimburse the affected parties and the right to terminate the contact. Given the outbreak’s global spread, laws may be passed to contain the virus which may also prevent a party from performing its contractual obligations (ex., travel restrictions or nationwide quarantine and self-isolation measures).
How to Invoke or Defend Against Force Majeure Claims
Invoking or preparing to fend off force majeure provision claims requires the following. First, after reviewing agreements to ascertain if including a force majeure provision:
– Analyze the force majeure definition to determine if it lists express events like COVID-19 or whether general language is sufficient to include COVID-19 and its consequences;
– Consider aspects of contract that are unable to perform and determine if the inability is due to COVID-19 consequences (direct or indirect) and not a different reason;
– Because demonstrating that all reasonable measures were taken and all official guidances were followed is critical, review steps taken to avoid/reduce COVID-19’s effects upon the workforce and evaluate the ability to continue performing, like remote working and adopting a “clean” team structure;
– Consider what notice is required to trigger entitlement to relief, including what type of supporting documents must be provided and when;
– Review financing documents to ascertain whether there are notice provisions regarding anticipated or actual force majeure claims; and
– Determine whether business interruption or force majeure insurance covers expected losses.
Second, if receiving a force majeure notice, examine the claim to determine:
– if it is consistent with force majeure provision’s scope of protection;
– if process for giving notice has been complied with; and
– whether relevant supporting documentation or information has been provided.
Parties involved in interrelated contracts should take a strategic approach evaluating force majeure claim’s overall impact on the universe of contractually imposed obligations. If embedded within a chain of contracts, prophylactically issuing force majeure notices under each contract makes sense as a protective measure.
Third, if making a force majeure claim arising from COVID-19 outbreak, record and document any steps taken to prevent or mitigate virus’s impact on contractual obligations performance. Evaluate how the force majeure event is framed and the consequences claimed to flow from event. For example, a party could claim that the COVID-19 outbreak constitutes the force majeure event or it could rely upon a supervening government regulation or a disruption in its supply chain or the supply of labor.
If you have any questions concerning the particularities of any contract or any specific concerns, please do not hesitate to contact the Hoban Law Group. We are here to assist you during this unprecedented time.