By Drea Schmidt and Claire Brown
We have spent the better part of the past week poring over force majeure clauses in commercial contracts. “Force Majeure,” literally translated, means “superior force.” In contracts, force majeure clauses are meant to excuse, or allow a delay in, the performance of a party to a contract if a majorly disruptive and unforeseeable event makes it impossible or impracticable for a party to perform their obligations under the contract. Otherwise, delay or non-performance would usually be a breach of the contract, entitling the other party to damages.
Force majeure provisions are usually considered “boilerplate” and are rarely analyzed, negotiated, or even read closely when parties enter into business agreements. In the current environment, everyone should have a good understanding of the force majeure clauses in their important agreements, and how COVID-19 and any related government restrictions or other activities, might affect their obligations or those of their counterparts. For more information on whether and to what extent the COVID-19 pandemic could excuse contractual obligations in the absence of a force majeure clause, read Jeanette Schuster’s recent blog post here.
Is COVID-19 Force Majeure?
It depends. First, does the force majeure clause arguably encompass an epidemic, pandemic, or similar public health event? And, if the clause can be read to include COVID-19, is the barrier to performance a direct result of COVID-19, or of a government order prohibiting gatherings? Some force majeure clauses will include one and not the other, while others might specifically include both epidemics and government mandates. Some others will not identify these things specifically, but might include, “without limitation” or similar words with the list of events that excuses performance. Others only refer to events that make it impossible for a party to fulfill its obligations in a timely manner. Also, note that fear is typically not sufficient to invoke force majeure – a party to a contract for a September conference cancelled today will have a much more difficult time relying on a force majeure argument than a party to a contract for a March conference.
Is Notice Required?
Many force majeure clauses require the party whose performance is affected to notify the other party, sometimes within a relatively short window, and often require an estimate of when performance is expected to resume. Failure to provide notice within the required time period may waive a party’s claim for relief under the force majeure clause. We anticipate that there will be arguments about when a COVID-19 force majeure event actually took place, and whether a required notice was provided within the right time frame, so notice should go out as soon as possible if required by the contract. The difference – whether the party breached and therefore owes damages, or whether non-performance was excused by force majeure – could be significant.
Is There an Obligation to Mitigate?
Often, a party affected by force majeure must take steps to mitigate the force majeure event and, when possible, resume performance. Whether parties complied with clauses requiring “reasonably possible” or “commercially practicable” mitigation efforts could be the subject of additional future fights.
Going Forward
Parties entering into contracts now should keep in mind that COVID-19, along with all of its ramifications, is now completely foreseeable. This means that COVID-19 will almost certainly not be considered a force majeure going forward; instead, parties should explicitly take it into account when they draft their agreements.
Conclusion
In these unusual times, know your risks and obligations, and think hard about your force majeure clauses, especially if you are considering them for the first time.
This client update is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have any questions regarding this update, or for more information about this topic, please contact the attorney with whom you normally consult or an attorney in our Corporate Finance Practice Group.
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