By: Steve Masur and Ilana Faibish
Does COVID-19 constitute a force majeure event under my contract?
The COVID-19 crisis has resulted in significant disruptions in most industries. A great many companies are struggling to meet their obligations under their commercial contracts. Now is certainly a good time for companies to dig up their commercial agreements and assess whether the force majeure clauses contained in them might provide relief under current circumstances. If you seek to suspend performance or have already suspended performance, you should consider whether COVID-19 qualifies as a force majeure event in your contract. If so, you should determine whether the risk of nonperformance was foreseeable and if mitigation measures were taken. Lastly, you should consider whether performance is actually impossible or commercially impracticable.
What is a force majeure clause?
A force majeure clause is a boilerplate contract provision that excuses a party’s inability to perform in the event that unforeseeable circumstances occur beyond the party’s control. Kel Kim v. Central Mkts., 70 N.Y.2d 900, 902 (1987). The clause may excuse a party’s performance if any of the force majeure events listed in the clause occur. Force majeure events could included strike, government action, acts of God, war, terrorist attack, pandemic, epidemic, or any other uncontrollable hazard on which the parties have agreed. However, merely including a force majeure clause in your agreement, and merely mentioning words like “epidemic,” or “pandemic” may not excuse performance. Rather, the fine print of your force majeure clause will become critical in a court of law, and by extension, in any negotiation that precedes going to court.
Does COVID-19 qualify as a force majeure event in my contract?
On its face, COVID-19 should qualify as a force majeure event if the force majeure clause in your contract includes words like “pandemic” or “government action” as events that excuse performance. If such events are not listed, it is possible that a reference to “acts of God,” which is more often intended to cover natural disasters like floods, hurricanes, and earthquakes, may cover nonperformance. But courts tend to narrowly interpret force majeure clauses. As a result, the more narrowly tailored the events listed in your clause are to COVID-19, the more likely performance might be excused. If your contract does NOT have an express contractual force majeure provision, there are other common law avenues of relief to consider, including impossibility of performance, frustration of purpose, and impracticability of performance. The doctrine of impracticability may provide relief if you can prove that “superseding events occur, the nonoccurrence of which was a basic assumption when the contract was made” and it would be unreasonable or commercially senseless to require performance in light of such events. This is a very high standard to meet and a court’s interpretation may vary depending on your respective jurisdiction.
In analyzing your situation, you should examine whether the event was foreseeable and as a result should have been contemplated upon signing the agreement. Courts will not typically apply force majeure when the parties could have expected the event to occur at the time of contracting, yet did not include the event in the clause – even with a catch-all provision. The foreseeability of a pandemic-related event is subject to debate. On one hand, the outbreak of COVID-19 may be interpreted as unpredictable and considered a classic force majeure event. On the other hand, some argue that this is not the first time in history that an epidemic or disease has affected contracts and industries, such as the 2009 flu epidemic or the 2003 SARS epidemic, and thus a foreseeable event that should have been considered in the agreement. As a result, it is always a good idea to include in your force majeure clause words describing any event that a court might otherwise consider having been foreseeable.
In the event of nonperformance, parties should undertake reasonable efforts to mitigate the effects of a force majeure event. It is important to realize that the other party may be open to amending performance obligations, such as considering partial performance as a solution which may be possible to achieve.
Finally, consider carefully whether performance is actually impossible. It is crucial to carefully document the degree of direct causation of COVID-19 as it relates to your impossibility to perform and to note that mere increased costs or economic burden may not be sufficient to excuse performance. For example, with the cancelation of televised sporting events, advertisers are seeking to suspend their advertising spend. However, something like COVID-19 does not prevent a broadcaster from showing the ad during the specified times, even though the televised content may have changed. Therefore, it may not legally be required for broadcasters to return money to advertisers under force majeure if performance under the agreement is not actually impossible.
It is important that you closely monitor COVID-19 developments and comply with the guidance of your state laws and officials. There are certain implications that apply if the force majeure event lasts for an extended period of time, such as a complete termination of the contract. In addition, take special note of insurance policies you own that may be redeemable under these circumstances. If you are uncertain as to whether your force majeure clause applies, it may be beneficial to discuss intervening industry matters with the other party to mitigate damages best you can.