By Lisa M. Richman, Shawn C. Helms, Craig Rasile, Jason D. Krieser, Paul M. Thompson and Matthew R. Cin of McDermott Will & Emery
In light of the novel Coronavirus (COVID-19) pandemic, many businesses are confronting circumstances that may excuse or delay their obligations to perform under existing contracts due to the occurrence of a force majeure event. This FAQ addresses common questions about force majeure and when and how COVID-19 might trigger such provisions.
In light of the novel Coronavirus (COVID-19) pandemic, many businesses are confronting (for the first time in their corporate history) circumstances that may excuse or delay their obligations to perform under existing contracts due to the occurrence of a force majeure event.
Force majeure is a contractual defense that allows a party to suspend or discontinue performance of its contractual obligations under specific circumstances. It may also operate to limit a contract party’s liability. What constitutes a force majeure event is determined on a case-by-case basis and depends upon the terms of the relevant contract, applicable law and other relevant facts.
Many force majeure provisions include a list of specific events that are not “reasonably foreseeable” and that are also beyond the parties’ control. A global pandemic such as COVID-19 (or its downstream effects and consequences) will likely qualify as a force majeure event if the provision specifically includes references to a “pandemic,” “epidemic” and/or “disease.” If the pertinent force majeure provision does not contain such specific disease references, other more generic “catch-all” provisions pertaining to “disasters,” “acts of God,” “national emergencies,” “government regulations” or “acts beyond the control of the parties” may be asserted to allege that COVID-19 and its downstream effects or consequences are indeed force majeure events.
1. How does COVID-19 affect contractual obligations?
- COVID-19 was first detected in Wuhan, China, in December 2019. Only a few months later, COVID-19 was declared by both the World Health Organization and Center for Disease Control a global pandemic that raised “a public health emergency of international concern.”
- Governments and businesses have implemented measures to prevent or curtail the spread of the virus in the form of travel bans, heightened border security (and in some cases border closures), restrictions on gathering sizes, closure of non-essential stores and businesses, cancelation of public events (including concerts and sporting events), and other similar measures.
- Consequently, many businesses are simply unable to perform their contractual obligations. Some have invoked force majeure to eliminate or limit liability due to their inability to perform such contractual obligations. Similarly, some companies have cancelled various contracts for goods and services in light of travel restrictions and other limitations.
2. What is force majeure?
- In general terms, force majeure refers to a contractual provision that limits liability due to unforeseen events outside the control of the parties that delay performance of the contract or prevent performance entirely.
- In the United States, all contract law matters are governed by state law. Therefore, the ability to claim force majeure depends upon the existence of an express force majeure provision in the contract, and the scope of relief offered under applicable state law. In general, courts will enforce a force majeure provision according to its terms.
- A party’s ability to delay or discontinue performance based upon a force majeure event depends upon the specific terms of the contract analyzed in conjunction with applicable facts and law.
- Where only one of the contract parties asserts a force majeure defense, the allegation may relieve the other counterparty from performance of its obligations as well, but this will depend on the nature of the obligations and the applicable law.
3. What type of events qualify as force majeure?
- Each force majeure provision must be considered on its own precise terms. Some general features common to most force majeure provisions include:
- The event was outside the reasonable control of a party;
- The event was not reasonably foreseeable by the parties, and the effects therefore could not be avoided;
- The relevant event materially affects the ability of one or more of the parties to perform their contractual obligations; and
- The party or parties took all reasonable steps to try to provide notice and to avoid or mitigate the relevant event or its consequences.
- Typically, a force majeure provision becomes applicable when performance becomes impossible and not when it simply becomes burdensome.
- In general, a force majeure provision excuses performance based upon the occurrence of specific qualifying events that constitute force majeure or that fall within the purview of a broader “catch-all” category of events that may qualify as force majeure events. These may include “acts of God,” war, fire, national emergencies, labor strikes, diseases, pandemics, epidemics, natural disasters, governmental acts or regulations, and other “acts beyond the control” of the parties.
- Other remedies that may be articulated in the contract or may be available under applicable law include extensions of time for completion or performance, the ability to terminate or suspend performance (in full or in part), and/or avoidance of liability.
- The contract may also state that the party affected by force majeure must first comply with certain obligations in order to take advantage of the protections offered by the provision.
- For example, the provision might require the affected party to provide notice to the counterparty and continue efforts to recommence performance to the extent possible, including through the use of alternate sources and workaround plans.
- In many instances, exercising a party’s disaster recovery and business continuity obligations and payment of fees is excluded from the force majeure provision.
- Domestic and international laws in both common law and civil law jurisdictions differ vastly with respect to how broadly or narrowly force majeure provisions are interpreted.
4. How does a party prove that an event was not “reasonably foreseeable” and therefore was outside its control?
- This is highly fact-specific. Most contracts contain specific lists of force majeure events that qualify as occurrences that are not “reasonably foreseeable” and are beyond a party’s control.
- If a party wishes to have an event such as the COVID-19 outbreak considered as a force majeure event, it would be ideal for the relevant provision to specifically include “pandemics,” “epidemics” or “disease.” Given the fact-specific analysis, each case must be evaluated individually.
- Even if the relevant force majeure provision does not contain such specific references, “catch-all” provisions such as “national emergencies,” “acts of God,” “governmental actions or regulations,” or “acts beyond the control” of the parties may also qualify COVID-19 and its downstream effects or consequences as a force majeure event.
5. What quantifiable impact is sufficient to demonstrate that COVID-19 had a “material impact”?
- The degree of impact or impairment of a party’s performance on its contractual obligations will depend on the facts and circumstances of each situation.
- A contract party asserting force majeure must establish a causal link between the relevant event and the party’s inability to perform. For example, the current and evolving restrictions designed to prevent the spread of COVID-19 may make it impossible to timely perform under the contract.
- The contract will dictate the circumstances under which performance will be excused (e.g., if a party’s performance is “impeded,” “hindered,” “prevented” or “interfered with”).
- A disruption that affects only the contract’s profitability may not be sufficient to constitute a force majeure event unless there is express language addressing profitability.
- An economic downturn or generally adverse business conditions are probably insufficient to constitute a force majeure event, even if it can be proven that such downturn was specifically caused by COVID-19.
6. What constitutes sufficient notice?
- Force majeure provisions generally require that the party asserting excuse of performance notify the counterparty of the relevant force majeure event(s) and provide required support. Some contracts contain detailed procedures and timelines for such notice. Some states require strict compliance with the notice provision in the contract when providing notice of force majeure.
- If the force majeure provision is silent concerning notice, the noticing party nevertheless may want to provide preliminary notice of the possibility of force majeure once it becomes evident that performance may be delayed or rendered impossible. The notice can always be amended or supplemented as additional details become available.
- Parties should always take care before asserting force majeure to avoid a premature claim for breach of contract or anticipatory repudiation. The counterparty may also seek to terminate the contract or avoid its own performance after receiving a notice of a force majeure event. If a legitimate force majeure defense is asserted, the party asserting force majeure will not be liable for breach of contract.
7. How does a party prove that it attempted to mitigate or avoid the force majeure event?
- If an event qualifies as force majeure and proper notice was given to the counterparty, a party relying on force majeure may still be found liable for not mitigating the harm derived from the non-performance of its obligations. The extent of the mitigation requirement is fact-specific and will depend on the language of the provision as well as applicable law and the facts.
- Where an alternative to non-performance is available, the contract parties should consider such alternatives in light of the relevant burdens and costs.
8. Can a party still be sued if a qualifying event occurs, proper notice is given and mitigation occurs?
- Given that the determination of a qualifying event, proper notice and mitigation are all subject to interpretation, litigation may ensue if the parties do not agree on these elements.
- It is important to analyze and consider the dispute resolution mechanism articulated in the contract or available under applicable law.
9. Are there differences between common and civil law jurisdictions regarding force majeure?
- There are important differences between the treatment of force majeure under common law and civil law jurisdictions.
- In common law jurisdictions (such as the United States and the United Kingdom), force majeure is not implied in contracts. Contract parties therefore must include such provisions expressly in the contract. Consequently, force majeure provisions can be negotiated to include broad or narrow terms.
- In civil law jurisdictions, force majeure generally is implied in contracts, so specific provisions are less frequently included in contracts. However, where they are included, they may allow the parties to circumvent possible limitations on the doctrine set forth in the applicable law.
- Even if the contract or applicable law does not provide a force majeure defense, some jurisdictions, including some US states, allow a contract party to assert analogous defenses under common law, such as “impossibility,” “impracticability” or “frustration of purpose.”
10. Will consequences arising from COVID-19 constitute force majeure?
- The extent to which COVID-19 and its downstream effects and consequences constitute a qualifying force majeure event is highly fact-specific and depends on the terms of the contract, the specific facts, governing law and how courts in the relevant jurisdiction(s) interpret force majeure provisions, among other things.
- Even if a contract does not have a specific force majeure provision, applicable law may allow a party to excuse performance under other theories in the face of unexpected events.
- The law is likely to evolve as a result of COVID-19, and many court rulings may result from this pandemic.
11. What steps can I take if force majeure might apply to my contract?
- Review your contract to determine whether the contract includes a force majeure provision, including:
- The specific events and circumstances that qualify for force majeure treatment
- Other relevant terms and conditions in the contract (including governing law, events of default, dispute resolution, etc.)
- Analyze whether the performance of any of the parties under the contract will be impracticable or impossible because of the direct or indirect consequences of COVID-19 and not for a different reason.
- Take all steps necessary to mitigate or reduce the effects of COVID-19 (including its downstream effects and consequences) on your ability to perform under the relevant contract.
- Timely comply with any notice requirements, including the production of documentary support and the specific method of notice (e.g., by registered or overnight mail to a specific address).
- Consider the potential consequences or downstream impacts of the counterparty suspending its performance under the contract if you notify it of a force majeure event.
- Determine whether potential insurance coverage is available, including business interruption insurance or an event-specific insurance policy.
- Document all steps taken to mitigate or avoid the impact of COVID-19 (or its downstream effects and consequences) on your ability to perform under the contract, as well as all other relevant facts and circumstances and the steps you have taken to provide notice.
12. What should I do if I receive a force majeure notice?
- Carefully examine the notice to determine:
- Whether it falls within the scope of the force majeure provision or applicable law
- Whether the form and timing of the notice was proper
- The availability and impact of applicable laws and facts
- When and how to respond, whether your performance or payment is excused, and whether to terminate the contract in response to the notice.
- Consider whether the notice has a downstream impact on any other contracts, and consider whether you should provide a copy of the notice to other parties.
- Consider if the party claiming force majeure has fulfilled its other obligations under the contract. For example, did the party have an obligation to implement a business continuity plan or otherwise try to find a work-around to the situation?
- Remember that in most states, an injured party has an obligation to mitigate its damages even if the force majeure claim is not proper and the non-performing party is in breach of contract.
13. What if a contract does not have a force majeure clause or the force majeure clause does not address the specific circumstance in question?
- There is a common law doctrine that if it is impossible to perform the contract due to circumstances that could not be reasonably anticipated, then failure to perform the contract is excused or delayed. The exact parameters of that doctrine vary by jurisdiction and will depend upon which jurisdiction’s law governs the contract.
- The law in some jurisdictions might also provide that performance of a contract can be excused or delayed if there are unexpected circumstances that make performance of the contract impracticable or that frustrate performance, thereby depriving a party of the benefit of the contract.
Lisa M. Richman is a partner in Washington, DC, with a focused practice on international dispute resolution matters. Shawn C. Helms is a partner in Dallas and co-head of the firm’s Technology & Outsourcing Practice. Craig Rasile is a partner in Miami with a focused practice on restructuring and insolvency matters. Jason D. Krieser is a partner in Dallas and co-head of the firm’s Technology & Outsourcing Practice. Paul M. Thompson is a partner in Washington, DC, representing clients in complex criminal and civil matters. Matthew R. Cin is an associate in Chicago.
McDermott Will & Emery is a leading international law firm with a diversified business practice. The firm has more than 1,100 attorneys in more than 20 locations on three continents.
Source: McDermott Will & Emery