Coronavirus (COVID-19) and Your Business: Mitigating the Impact
Can that Force Majeure Contract Clause Help?
By: Adam Hersh, Partner; Litigation Practice Group
Coronavirus is a serious epidemic, the likes of which we have not seen before. The law recognizes that certain uncontrollable circumstances (such as the Coronavirus epidemic) may make performance of business obligations impossible or impractical under the circumstances. This is known as a “force majeure” or a “force majeure event.” In simple terms this is something that cannot be anticipated or within someone’s control. Force majeure events include “acts of nature/God” (such as a flood, earthquake, hurricane, tornado), acts of people (riots, strikes, government-imposed shutdowns, etc.), or more broadly those events that are determined to be completely outside of one’s control and thus excusing performance.
The Force Majeure Clause
Many contracts contain what is called a “force majeure clause.” These are contractual provisions which eliminate what would otherwise be a default for non-performance because of a force majeure event. Here is an example as to how this works. Imagine I promise to deliver you an important machine by Thursday morning. Now imagine late Wednesday evening an earthquake were to hit which results in all of the roads being closed indefinitely. Clearly this would prevent me from fulfilling my obligation, and I would be in default. However, it was not my fault the earthquake happened; I had no control that the roads were shut down. If my contract to deliver you the important machine contained a “force majeure clause” I would likely be exempt from any default penalties for a delay in performance.
In order to assess whether your business may be impacted by you or the other party evoking a force majeure clause, you have to first determine whether your contract contains such a clause and what it includes. For example, here is a typical force majeure clause:
No Party shall be liable or responsible to the other Parties, nor be deemed to have defaulted under or breached this Agreement, for any failure or delay in fulfilling or performing any term of this Agreement, when and to the extent such failure or delay is caused by or results from acts beyond the impacted Party’s (the “Impacted Party”) reasonable control, including the following force majeure events (“Force Majeure Events”): (a) acts of God; (b) flood, fire, earthquake or explosion; (c) war, invasion, hostilities (whether war is declared or not), terrorist threats or acts, riot or other civil unrest; (d) government order or law; (e) actions, embargoes or blockades in effect on or after the Effective Date of this Agreement; (f) action by any governmental authority; (g) national or regional emergency; (h) strikes, labor stoppages or slowdowns or other industrial disturbances; and (i) shortage of adequate power or transportation facilities.
Note that this clause does not expressly include public health events like a pandemic, making it uncertain whether this language can provide relief for a defaulting party. See this article regarding how this defense is playing out in China: https://www.cnbc.com/2020/03/06/coronavirus-impact-china-invokes-force-majeure-to-protect-businesses.html
If the contract has no force majeure language at all, then a court will base its decision regarding whether to excuse the default of an affected party during the force majeure event on the foreseeability of the event. There are a variety of laws that may come into play; for example, the Uniform Commercial Code (UCC) excuses a seller of goods from timely delivery or for non-delivery of goods where its performance has become impracticable either: (a) by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made; and (b) by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid. (UCC § 2-615(a).) Accordingly, the government ordered isolation and travel bans we are experiencing are important factors in the assessment.
What Should you Be Doing?
With Coronavirus (COVID-19) shutting down operations, you and your business may be in a situation: (1) where your business cannot perform its obligations; (2) where your business can perform but your vendors cannot provide you what you need to perform; and/or (3) where your business can perform but your customer no longer needs your product or service. For example, today the NCAA announced the cancellation of March Madness. Imagine you hold the contract to provide food for an arena where the NCAA tournament games would be played. Your business could have performed, but your customer no longer needs the product because there is no game being played due to the virus. (We will be writing a separate business-interruption insurance piece which in part addresses this very issue.)
While this is all very overwhelming, there are steps you can take:
Every situation is different, but the common thread is that timely assessments of your options and effective communication are key! The evaluation of your circumstances, risks, and options should be happening now. The messages you and your business communicate must be crafted properly.
If you have questions, please contact us to help you assess your situation, develop a strategy and execute. As is usually the case, knowledge is power. We know these are very challenging times and wish to be a resource for you as you continue to navigate this crisis.
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