COVID-19 Pandemic Brings Force Majeure Clause To The Center Of Contract Negotiations
Written by: H. Buckley Cole, Esq.
Force majeure clauses have been commonly found in contracts, often buried with numerous “Miscellaneous Provisions” at the back of the contract. They were rarely negotiated or litigated over. But that state of affairs has changed quickly and these clauses will likely receive extensive scrutiny in the coming years because of the COVID-19 pandemic.
According to Black’s Law Dictionary, “force majeure” is a French term meaning superior or irresistible force. A force majeure event is generally a supervening event which excuses or suspends performance of a contract. The event is not within the control of either party. No uniform set of events constitutes “force majeure”. Instead, it provides “a flexible concept that permits the parties to formulate an agreement to address their unique course of dealings and industry idiosyncrasies.” Richard J. Ruszat II, Force Majeure¸104:5 Bus. Credit 54 (May 1, 2002). The contracting parties can assess their respective risks and try to address them through identifying triggering events in the force majeure clause.
The flexibility of the parties may not exist where an industry is required to use a standard contract by custom or regulation. This article does not address the situations where negotiation over force majeure clauses may be negligible or non-existent.
In negotiating or drafting a force majeure clause, you may want to consider the following issues:
Do you benefit from the opportunity to avoid performance of the contract due to COVID-19 or do you benefit from enforcing the contract regardless of COVID-19?
The question is fundamental. Depending on the other terms of your contract, you may want to limit the ability of the other party to excuse its non-performance. If so, you may propose that COVID-19 is now a known risk and should not be listed as a force majeure event. Another approach would be to allow for a delay in performance if, for example, a quarantine is in effect until such time as the quarantine is lifted. If the impacts of a new wave of the pandemic would destroy the purpose of the contract, the parties can remove the COVID-19 pandemic from the force majeure clause and address the risks posed in a separate provision.
Will a return of COVID-19 or another pandemic be covered by the force majeure clause?
The courts may interpret the force majeure clause narrowly. Why leave the question for the courts to decide? Instead, if the goal is to address the consequences of the COVID-19 pandemic, then include a specific force majeure event for a pandemic or epidemic. For a broader event that would include more communicable disease situations, you could list a public health emergency and/or communicable disease outbreak as a force majeure event. Similarly, the parties could list quarantines as a force majeure event. Even broader events that arguably cover the COVID-19 pandemic are a governmental or administrative action, like a declaration of a national or state emergency, or changes in laws or regulations. With the broader types of events covered in a force majeure clause, the more likely the law of unintended consequences comes into play. Governmental actions could address countless issues totally unrelated to the communicable diseases that triggered the parties’ focus on the force majeure clause. In a manufacturing or sales contract, a pandemic like COVID-19 could also trigger force majeure events like a failure in upstream suppliers, or a breakdown of a logistics chain, or labor stoppages.
Do the parties want to exclude foreseeable events from the force majeure clause?
The clause can simply exclude certain events that may have been reasonably provided against, avoided or overcome. In that case, the COVID-19 pandemic may be considered as an excluded event because it is a well-known and foreseeable risk unless the parties expressly included it. Similarly, the parties can expressly agree that certain acts of God or other events are not included in the force majeure clause.
What casual nexus has to be established between the event and the working party’s nonperformance?
The mere existence of a force majeure event is usually insufficient to excuse nonperformance. Does the force majeure event have to render performance impossible? Or are the parties satisfied with a lesser connection such a rendering performance impracticable or economically prohibitive? The nexus could be satisfied if the force majeure event merely interferes with performance. The contract should delineate the necessary nexus.
What are the consequences of the force majeure event?
Does the force majeure clause allow the invoking party to have additional time to perform or to reschedule an event or deadline? Or does the non-invoking party prefer an option to simply delay performance by the invoking party? Scheduling deadlines or events amidst the uncertainties caused by the COVID-19 pandemic makes the ability of a party to postpone performance a very practical alternative to non-performance in some circumstances. Also force majeure clauses often provide the invoking party only partial relief of its obligations. For example, the invoking party typically still has to continue payments, if applicable, even when other obligations may be suspended or excused.
What duty does the invoking party have to mitigate or avoid the effect of the force majeure event?
The parties can specify that mitigation efforts are required before invoking relief with the force majeure clause. The law of the state governing the contract may impose a common law duty to mitigate. Clauses can require, for example, the invoking party to make all reasonable efforts to perform before non-performance can be excused.
Which state’s law governs the interpretation of the contract and hence the force majeure clause?
State law interpreted force majeure clauses can vary. Court decisions on this issue are generally very fact specific. A significant amount of force majeure case law grew out of the adoption of nationwide prohibition of the sale and consumption of alcohol nearly 100 years ago. Many cases arose out of the World Trade Center attack. Still, some states still have little law on this issue. But that is likely to change soon with the explosion of COVID-19 related litigation.
Since the arrival of COVID-19, contracting parties can no longer treat the force majeure clause as boilerplate. Some experts predict that the pandemic will not end anytime soon. Consequently, the COVID-19 virus and other epidemics and health emergencies should be addressed carefully in your force majeure clauses.
If you need assistance with this critical issue, please reach out to Hall Booth Smith. For more reading, please visit Mr. Parkerson’s blog “COVID-19 and Force Majeure in International Commercial Contracts.”