The outbreak and public response to the Coronavirus (COVID-19) has large segments of our economy and society reeling. Issues concerning telecommuting, social distancing, and similar labor and health issues may be overwhelming businesses at the present time. However, the economic impact of the current pandemic also means that business owners, in addition to all of the other issues that they are currently facing, have to review and assess what impact these events are having currently and may have in the future on their outstanding and existing contracts.
“Force majeure” is a contractual term in which contracting parties seek to address what occurs if performance becomes impossible or impracticable due to the occurrence of certain specified events or, more generally, due to events outside the control of the parties to the contract. This provision is a way to allocate risk between the parties and acts as a shield from liability if a party’s performance is excused. The intent of this E-Brief is to discuss the impact and purpose of such clauses and why business owners may have to act swiftly to preserve their contractual rights under their current business contracts. The lack of such a “force majeure” clause does not necessarily mean that all is lost, but it does require a different analysis than what will be discussed below.
Generally, a “force majeure” clause will be a stand-alone provision in a contract and is drafted in a manner that it will generally apply to both contracting parties. The types of events listed in such a clause can be carefully negotiated so that if such an event occurred, either party may be relieved of having to contractually perform under the contract.
Thus, for example, if the language of a force majeure clause includes references to epidemics or pandemics, then the current COVID-19 outbreak would provide a sound justification for the affected party to claim that a force majeure event had occurred and that party’s contract performance was thereby excused. Both the World Health Organization and the Department of Health and Human Services have declared COVID-19 a public health emergency. This, however, does not end a business owner’s inquiry, since often there are notice requirements that must be satisfied in order to fully rely upon such a provision.
A force majeure clause typically further requires that the affected party must promptly act to notify the other party that a force majeure event is being claimed. The notice requirements may be specific in mandating a certain method of notification (e.g., certified mail, email to specific people, etc.) or that notification be given within a certain time. An e-mail, for instance, may not be sufficient for purposes of giving notice under the parties’ agreement. As such, companies must review their current contracts and make an assessment if the current situation will impact their contractual performance and make sure that any required notice obligations are satisfied.
If the event at issue is not listed in the force majeure clause, then absent some generalized language within the provision, the occurrence of such an event likely will not excuse such a party’s performance.
Assuming that a company has only a boilerplate force majeure provision in its contract, there is an argument that for many businesses the outbreak of COVID-19 may qualify as an “other cause beyond the reasonable control of either party” assuming, of course, that the effect of the COVID-19 outbreak is causing a disruption of its contractual obligations. In addition to the announcements of the World Health Organization and the Department of Health and Human Services, the President on March 13, 2020, declared a national emergency under the Section 201 and 301 of the National Emergencies Act with respect to the COVID-19 outbreak. Many state and local governments have also declared emergencies for their jurisdictions. Such declarations may be indicative of events happening beyond the reasonable control of either party. Again, though, if a company wishes to invoke a force majeure clause and excuse its performance under any agreement, it needs to also comply with any notice requirements as mentioned above. Obviously, business owners are trying to respond to a number of challenges in light of the COVID-19 outbreak, but companies need to also assess the impact that outbreak has on their on-going contract obligations and proactively determine whether or not to seek relief under any available force majeure provisions.
Recommendations and Action Steps
- Determine whether due to the COVID-19 outbreak, your company’s contract performance is being materially impacted.
- With respect to those contracts, review contract language to determine if a force majeure provision exists and scrutinize the scope of relief it may provide.
- Furnish the contractually required notice and supporting documentation. Each contract should be carefully reviewed to determine the timing and manner of notice required along with any other documentation or support that may be required.
- Although monetary relief may not be available, document and keep track of any time and cost impacts.
- Evaluate whether any insurance policies may provide relief. Companies should review their existing insurance policies and contact their brokers to determine whether any existing policies, such as a business interruption policy, may provide relief.
If you have any questions on this topic or need assistance, please contact our Business Services, Financial Institutions, and Real Estate Practice Groups. We encourage you to subscribe to our E-Briefs for the latest news, tips, and updates.
Woods Aitken recently launched a coronavirus resource page that includes valuable information regarding the coronavirus pandemic and all of our recent publications on COVID-19. We encourage you to visit this page often for updates.