Words Matter in a Time of Crisis: Force Majeure Clauses and COVID-19
Buried within the boilerplate of many commercial contracts is a “Force Majeure” clause. Such clauses are often ignored until unforeseeable circumstances arise that prevent a party from fulfilling its obligations under a contract. The COVID-19 pandemic and orders being issued by all levels of government make it necessary for practically every business to consider the implications of the Force Majeure terms of its contracts.
A Force Majeure provision in a contract is intended to excuse a party’s performance if specified circumstances beyond the party’s control arise making performance impracticable, illegal, or impossible. Force Majeure provisions typically have three elements: (1) a list of types of events that are deemed to be triggering events, (2) a statement identifying the party bearing the risk of such a triggering event, and (3) a set of statements identifying the effect of such a triggering event on the obligations of the parties to the contract.
Triggering events typically fall into two groups. The first group comprises acts of nature such as earthquakes, floods, fire, famine, plague, and “Acts of God.” The second group comprises political and governmental acts. These include terrorism, riots, war, strikes, change of law or regulation, and orders issued by the government. The COVID-19 pandemic falls within the first group, and the orders being issued by the federal government, and state and local governments across the country, fall into the second group.
It is important to review the Force Majeure provisions of a specific contract to see exactly what triggering events are listed. This is because courts typically read these provisions narrowly so only an event listed in the Force Majeure provision will be treated as a triggering event. If the Force Majeure provisions list pandemic, “acts of God” or “governmental action,” then it is likely the COVID-19 pandemic and related government orders to combat the pandemic are triggering events under the Force Majeure provision.
It is not enough, however, that the event be identified as a triggering event in the contract’s Force Majeure provisions. The event must also be a direct cause of a party’s inability to perform its contractual obligations. If the party’s performance is not unduly hampered by an event, performance is typically not excused. For example, several states have ordered non-essential businesses to cease operations. If a company is not operating in one of these states or is deemed to be an essential business, the issuance of the order may not excuse performance.
One must also read the Force Majeure provisions to see what affect the event has on the performance requirements of the parties. Sometimes the effect is to delay performance until the time the circumstances return to normal. Other times, the effect is to excuse performance altogether. In still other cases, the Force Majeure clause may specify that the contract is terminated (or may be terminated at the option of a party) should a Force Majeure event occur and affect operations for an extended period specified in the contract.
Virtually every contract has an implied covenant of good faith and fair dealing. As such, communication is key. Thus, you should notify the other party to the agreement if you are using COVID-19 or an order issued by the government as a basis for suspending performance or for non-performance. Failure to give timely notice may result in a waiver of any ability to rely on the Force Majeure provisions in defense of a claim for breach. Likewise, there may be other business solutions you will wish to explore with another party.
The specific language of the agreement will often identify what types of performance are excused when a triggering event occurs. Force Majeure provisions do not always excuse all performance even where there is triggering event. For example, Force Majeure provisions typically do not excuse payment obligations for goods or services that have been, or will be, delivered in a timely manner.
The DeWitt legal team stands ready to assist with contract interpretation, notice requirements, and negotiating business terms to mitigate the business effects of COVID-19 and the government edicts issued to control the spread of the Coronavirus.