By: Paul Durham and Mark Dell’Orfano
March 20, 2020
The response of governments, regulators, and public health organizations to the coronavirus COVID-19 pandemic continues to evolve on a daily and, at times, hourly basis. Businesses worldwide are moving rapidly to preserve the health and wellbeing of their employees and customers while also maintaining business continuity and managing financial stress. Given the extraordinary global reach of COVID-19’s impact, a party who is considering suspending its performance under a contract might assume that it is free to do so without consequence. Of course, this is not necessarily true. Counterparties who seem cooperative and sympathetic at an early stage of a crisis may not remain so understanding as the situation evolves. Businesspeople should take the time to review the terms of their core contracts to understand their rights and duties should COVID-19 or other events impair the contracting parties’ ability to meet their obligations.
The starting point for any such assessment is a review of the “force majeure” clause found in many commercial agreements. The legal concept of force majeure comes to us from the French legal tradition and has been relied on for centuries as one of several legal justifications for failing to perform under a contract when an unforeseen event outside of one’s control – a freak lightning storm setting fire to a dress shop, a ship sinking, or even a plague – renders contractual performance impossible.
The concept of force majeure has survived, but in a different and more sophisticated form than it did in the past. Today’s force majeure clauses are express contractual provisions that are bargained for (sometimes heavily) as part of commercial agreements. Modern force majeure clauses still sometimes name specific catastrophic events, such as flood, storm, riot, war, and act of God (epidemics and public health emergencies are sometimes listed, but not always), among other discrete circumstances as so-called force majeure events. However, modern Courts are less concerned about the mode of a claimed force majeure event as they are with the foreseeability of the given occurrence and the impracticability of the contracted-for performance . Even if a specific event of force majeure has occurred within the meaning of a contract, careful analysis of the circumstances remains warranted. In most clauses, the event must render performance objectively impracticable if not impossible , not just inconvenient or financially burdensome .
Assuming that an event of force majeure has been established within the meaning of the contract, the party seeking to declare force majeure must be mindful of any additional requirements and conditions imposed by the agreement. For example, timely notification (either as soon as reasonably practicable or within a certain number of days) is usually mandatory. Further, the affected party may have a continuing obligation to undertake reasonable efforts to resume performance or to provide periodic status reports to the other party. A failure to comply with these obligations could negate the affected party’s rights under the declaration of force majeure.
Finally, a contracting party should be aware of the specific contractual results of a force majeure declaration. A declaration of force majeure may discharge an entire agreement or merely suspend obligations. Excused performance is not always permanent, and the party awaiting performance may have the right to terminate the contract should the event of force majeure last longer than a specified period of time. With respect to long term supply agreements, counterparties may, in turn, be excused from exclusivity provisions or minimum purchase requirements because of an event of force majeure. Again, the terms of each force majeure clause will vary and each party should have a full understanding of the agreed upon ramifications before declaring or responding to a declaration of an event of force majeure.
Governing Law, Impossibility of Performance, Frustration of Purpose
Unforeseen events are, by their nature, difficult to address. Even carefully drafted force majeure clauses may be found to be incomplete or ambiguous when considered in light of unexpected circumstances. In case of a dispute between contracting parties, force majeure clauses will be subject to interpretation in accordance with the governing law of the contract. For that reason, understanding the choice of law, venue, and dispute resolution provisions of the agreement remain an important part of any contract analysis.
Importantly, not all contracts include force majeure clauses. In these situations, parties affected by unforeseen circumstances may still have rights and remedies under applicable law. For example, doctrines such as impossibility of performance and commercial frustration may be useful to parties whose contracts are silent with respect to force majeure. A nonperforming party asserting impossibility would need to show that a supervening event has made the performance impossible or severely impracticable . With respect to commercial frustration, the nonperforming party would need to assert and show that the supervening event has frustrated the entire purpose for which the contract was made, rendering performance pointless . Courts will apply governing law to determine whether to discharge a contract based on impossibility or frustration claims.
Business continues even during uncertain times, and new agreements will undoubtedly be negotiated and entered into. Although the ultimate effect of COVID-19 may still be unknown, the pandemic itself is no longer unforeseeable. Contracting parties should be proactive in negotiating terms that are tailored to allocate risk and incorporate risk mitigation strategies. What does seem certain is that COVID-19 will impact every business to some degree. As businesses assess their risk and adapt to a changing commercial landscape, now is the time to consider how they will respond should they, or their contracting partners, be unable to fulfill contractual obligations due to circumstances beyond their control.