FORCE MAJEURE AND COVID-19: Contract Analysis in the Context of a Global Pandemic
COVID-19's spread has taken a massive toll on health and morale nationally and globally, but procedures implemented to mitigate its human effect – social distancing, quarantines, travel restrictions, etc. – have caused and will create significant interference with business operations. Governmental and social mandates reverberate through markets by triggering employee absences leading to reduced productivity and supply chain delay and customer absences leading to reduced revenue. To ensure the ongoing viability and health of our economy's businesses, we must be poised to tackle those business disruptions as efficiently as possible.
Business relationships are founded upon contracts governing those relationships. Therefore, thoughtful analysis of the governing contracts is imperative to address any interference with business relationships and the liabilities stemming from that interference. The "force majeure" (literally translated to "superior force") or "Act of God" clauses within contracts are often considered boilerplate and not the subject of focused scrutiny during contract negotiation, but may become the lynchpin in businesses' decision making processes regarding how to address issues stemming from the coronavirus pandemic.
Force Majeure Provisions
Force Majeure Provisions are designed to allocate the risk of a party's inability to perform pursuant to a contract based on the occurrence of an unforeseeable event outside of the parties' control. Notably, the unanticipated event must be an unavoidable legal or physical restraint – it is not enough that the event merely renders an obligation more costly to meet. If a party's performance is prevented by such an "force majeure" event, the party may be relieved from its contractual obligation and insulated from liability for its non-performance. Whether a party's responsibilities will be abrogated is necessarily dependent upon the application of the precise language of the governing force majeure clause to the event in question.
Based upon the current landscape of existing and anticipated business disruption, it is incumbent upon businesses to examine their (and their counterparty's) contractual rights and obligations in the event performance is rendered impossible or impracticable. (Even in the absence of a force majeure clause, businesses should consider the effects of an attempted reliance on common law defenses to non-performance such as frustration of purpose or impossibility based on unforeseen event that frustrates the core purpose of the contract.)
The first step in the force majeure analysis is determining whether the event in question constitutes force majeure under the contract. Businesses should note that Courts typically interpret force majeure clauses narrowly, so unless clauses contain words like pandemic, disease, quarantine, etc., Courts may be reluctant to recognize the coronavirus itself as a "force majeure." Additionally, Courts generally construe any ambiguity against the party seeking to be relieved from its obligations, and in many states (including New York) Court's will only consider a force majeure clause triggered when the contract expressly includes the event in question. It is arguable, however, that broader terms such as plague, government action, or state of emergency could encompass COVID-19 related events.
Regardless, Courts will refrain from the enforcement of force majeure provisions when the party seeking relief could have anticipated the event in question at the time it entered into the contract. Therefore, the foreseeability of the current pandemic will inevitably become a point of debate in the analysis of force majeure claims.
Causal Link and Impairment
Once it is determined that COVID-19 is included within the itemized events in the contract at issue, and was unforeseeable to the party seeking relief, the force majeure analysis will focus on whether the virus sufficiently impacted the possible performance of a party. Force majeure clauses typically specify the level of impact necessary for the clause to be triggered: terms such as renders impossible and substantially hinders are often implemented. Whether an event rises to the level of impact set forth in the clause necessarily requires a case by case factual analysis. Importantly, in demonstrating the causal link of the event to the impairment and the level of impairment, parties seeking relief will be required to show how actual performance was hindered, and not merely that performance became more burdensome or economically irrational.
Mitigation and Notice
To obtain relief from contractual obligations based upon a contractual force majeure provision, a party must demonstrate that it has mitigated the impact of the event in question and that the effects of the event are so severe that the terms of the contract can no longer be performed. When contracts do not enumerate necessary levels of mitigation effort, Court's will likely refrain from granting relief to a party if the event's impact on that party could have been reasonably avoidable.
Finally, for a party to obtain relief from contractual obligations based upon a force majeure event, it must comply with any notice provisions in the contract. Failure to do so could result in a waiver of a party's right to relief for its failure to perform. Conclusion and Practical Considerations
It is undeniable that the COVID-19 pandemic and the efforts to mitigate its human effects will exert extreme pressure on current and future contractual obligations. In many cases, that pressure will result in non-performance and loss, which will inevitably create disputes. Businesses' abilities to analyze the force majeure provisions of their contracts will help determine their readiness to evaluate such disputes and either efficiently negotiate or successfully litigate with their counterparties. Therefore, it is advisable to:
- proactively evaluate the force majeure provisions of existing contracts in the context of the relationship between the performance contemplated in the contract and the current pandemic;
- identify contingent methods of performance or mitigation of disruption;
- note deadlines and requirements for notice;
- assemble documentation evidencing the impact of COVID-19 on business operations, damage, and mitigation attempts;
- consider the affected business relationship as a whole when developing strategies for negotiation or litigation, including governmental reporting requirements, potential effects on other contracts/relationships, possible insurance claims relating to losses. ZEK's attorneys can assist your business with drafting, analyzing, negotiating, and enforcing force majeure provisions within a broad spectrum of commercial contracts. We are ready to assist you with any questions or issues you may encounter.