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Does COVID-19 trigger a contract’s force majeure clause?

The coronavirus pandemic is causing a substantial disturbance in many industries, which includes either the cancellation or postponement of popular events and conferences, such as SXSW, Google News Initiative Summit, March Madness, Facebook’s F8, and Mobile World Congress.

There are other effects companies are facing in addition to event cancellations. One large effect across the board is that companies are struggling to meet their contractual obligations. This may prompt a company in this particular situation to find potential relief within a provision, usually found in a contract’s boilerplate section, called the force majeure Clause.

What is a force majeure provision?

A force majeure clause is a “contract provision present in most commercial contracts that excuses a party’s performance of its obligations under the contract when certain circumstances arise beyond the party’s control making performance inadvisable, commercially impracticable, illegal, or impossible.” Force majeure clauses often provide a list events (though many do not) that are usually extreme, often referred to as force majeure events. If any of the listed events occur, it can excuse a party’s contractual obligations under the agreement. Force majeure clauses can vary in length or the wording used in the clause.

Though, most will list events like epidemics or pandemics, war, terrorist attacks, “acts of God,” famine, strikes, and fire when listing the types of events that would excuse or delay a party’s performance obligations.

What Constitutes as force majeure?

Here’s the test.

The “test” for force majeure usually requires the satisfaction of three distinct criteria (please note—the criteria are taken from UK based source, but it still very applicable to many U.S. jurisdictions) :

  1. the event must be beyond the reasonable control of the affected party;

  • the affected party’s ability to perform its obligations under the contract must have been prevented, impeded or hindered by the event; and

  • the affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences.

Please keep in mind that, in evaluating the criteria above, the force majeure clause “should be construed in each case with a close attention to the words which precede or follow it, and with a due regard to the nature and general terms of the contract.” The effects of the force majeure clause may vary from contract to contract.

Examples of force majeure events.

Examples of force majeure events are often spelled out within the clause. Some examples of events that often trigger force majeure clauses include:

  • acts of God, such as severe acts of nature or weather events including floods, fires, earthquakes, hurricanes, or explosions;

  • war, acts of terrorism, and epidemics;

  • acts of governmental authorities such as expropriation, condemnation, and changes in laws and regulations;

  • strikes and labor disputes; and

certain accidents. (Economic hardship typically is not enough to qualify as a force majeure event on its own.)

COVID-19 and force majeure.

As mentioned above, many force majeure clauses will often list the events that will trigger the clause. Clauses that lists plagues, epidemics, or pandemics, or any related term will cover COVID-19. A force majeure clause that lists ‘act of government’ may also cover COVID-19. An act of government occurs when a “government body has imposed travel restrictions, quarantines, or trade embargoes, or has closed buildings or borders.” What is less clear, as Pinsent Masons point out, is when the government makes a recommendation rather than uses its legal power to enforce an order.

A company looking to get relieved from its performance obligations under a contract contractual agreement through the agreement’s force majeure clause must have experienced a legal or physical limitation. It is not enough to experience an economic restraint. Most force majeure clauses have a ‘catch-all’ list of force majeure events (e.g., “any event that is beyond the reasonable control” of the affected party). Though many clauses have this ‘catch-all’ language, courts tend to interpret force majeure clauses very narrowly. As the National Law Review suggests, if a force majeure clause actually lists a pandemic, epidemic, disease, then chances are the COVID-19 pandemic qualifies as a force majeure event. As stated above, ‘acts or government’ and ‘acts of God’ may also qualify as force majeure events due to the governmental efforts to fight the pandemic and its effects.

Thinking of making a force majeure claim? Here’s what to do.

In many jurisdictions, a party that seeks relief under a force majeure clause has a duty to mitigate the effects of the qualifying event. This means that a party affected by the COVID-19 pandemic should record and document any steps or efforts to mitigate the effects of the COVID-19 pandemic on its obligations to perform.

Sherman and Sterling suggest that a party making a force majeure claim “should consider carefully how the force majeure event is framed, and the consequences that are said to flow from that event. For example, a party could claim that the COVID-19 outbreak constitutes the force majeure event, or it could rely upon a supervening government regulation or a disruption in its supply chain or the supply of labor.”

But, be careful. A failed force majeure claim can have serious consequences and the claimant may be responsible for breach of contract or contractual abandonment. If that should happen, then the other party may be entitled damages or termination of the contract.

Is there another option?

If there isn’t a force majeure clause in your agreement, there may be other options of relief. ‘Impossibility of performance,’ ‘frustration of purpose,’ or ‘impracticability of performance’ may be your way out, though this calls for a separate analysis than the one for force majeure. Depending on your state or application of law specified in you contract, the name and application of these tests will differ.

An example and general definition of ‘frustration of purpose doctrine’ is illustrated in the Massachusetts case, Chase Precast Corp. v. John J. Paonessa Co:

“[W]hen an event neither anticipated nor caused by either party, the risk of which was not allocated by the contract, destroys the object or purpose of the contract, thus destroying the value of performance, the parties are excused from further performance.”

Check out National Law Review’s explanation of ‘impossibility’ and ‘frustration of purpose.’

You can also look to Section 2-615 of The Uniform Commercial Code (UCC), which notes that a “seller” is relieved from performance under a contract when “performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”

Additionally, you may look to Section 254 of The Restatement (Second) of Contracts, which defines impossibility as “not only strict impossibility but impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved.”

If the COVID-19 is pushing you to find relief from the obligations of your contractual agreement, find a lawyer to discuss if any of the above options are right for you.

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