Force Majeure Clauses for COVID-19

Alert

As the spread of COVID-19 fills headlines, prudent businesses are making plans for potential business interruptions and may already be experiencing disruptions in their supply chains.  In this client alert, we provide an overview of some key legal and business considerations regarding the reliance on force majeure clauses to provide relief from performance under contracts.

As always, Honigman is focused on you, your business, and your success.  Together we will weather this storm, continue to service our clients and take steps to permit us to meet deadlines no matter what the COVID-19 outbreak brings.

Is COVID-19 a force majeure event?

Whether, and to what extent, the COVID-19 outbreak constitutes a force majeure event requires a fact specific inquiry that will depend largely on the language of the agreement under consideration.  A company seeking to invoke its rights under a force majeure clause, or a company that has received a force majeure notice, should not assume that the applicable agreement includes a force majeure clause or, if it does, that the COVID-19 outbreak is necessarily a force majeure under the agreement.  Commonly, an agreement that includes a force majeure clause will also define and include a non-exhaustive (or sometimes exhaustive) list of examples of events constituting a force majeure.  Common definitions focus on unforeseen events that are outside of the control of a party and include occurrences such as natural disasters, government interventions, and so-called “acts of God.”  Often, agreements provide that financial constraints and the financial inability to perform do not constitute a force majeure event.  Moreover, even in those instances where an event like the COVID-19 outbreak fits within the definition or is one of the listed examples of a force majeure it may nevertheless remain unclear as to whether the language of the agreement applies to the specific situation at hand.  Courts will generally evaluate the force majeure provision in a manner similar to other contractual provisions according the plain meaning of its terms.

When is performance excused by a force majeure event?

A force majeure event only excuses performance if it is the cause of an inability to perform.  If, for example, a party’s performance is only made more difficult, time consuming, or expensive as a result of a force majeure event, performance may not be excused.   Furthermore, a force majeure clause may only excuse certain types of performance.    

Understand and comply with force majeure procedures and obligations.

Even in those circumstances where an event constitutes an event of force majeure and it causes an inability to perform, an agreement may require compliance with specified procedures.  Often agreements require that the party seeking to rely upon a force majeure event to excuse its performance provide prompt written notice (sometimes within a set, limited number of days).  Agreements may also require that the notice include an estimate of how long the force majeure event may last and a description of steps that are being taken to mitigate its effects.  In any event, a party experiencing a force majeure event cannot simply send a notice of force majeure.  Similar to the concept of mitigating damages, a party must take reasonable action to minimize the impact of the force majeure event and carefully document that action.   

A force majeure event may also trigger additional obligations such as those relating to business continuity or disaster recovery, including in some cases, the obligation to manufacture or acquire a buffer stock of inventory and put other contingency plans in place.

Should I send a notice if I anticipate a force majeure event?

Agreements may require notice of a potential force majeure even if an inability to perform as not yet occurred.  Even if not an express contractual obligation, it is generally a good idea to communicate with customers and suppliers regularly regarding potential interruptions in supply so that all parties may prepare and plan accordingly. 

Giving formal notice of a force majeure event should not be done lightly.  Many commercial agreements include provisions that permit the party entitled to receive the performance which is disrupted to terminate the agreement if performance will not be restored within a specified period.   This potential loss of business may represent a significant risk to a company declaring an event of force majeure.

What if my supplier is experiencing a force majeure event?

Do not assume that performance due to a customer is excused simply because a lower tiered, sub-supplier fails to provide critical goods or services on time (even if that failure is due to COVID-19 or another event that may constitute an event of force majeure in the agreement between the ultimate customer and its tier one supplier).  Depending on the particular facts, a sub-supplier or affiliate experiencing an event of force majeure may or may not trigger a force majeure provision and excuse the performance of a higher-tiered supplier.  Each situation must be evaluated in light of the specific facts involved to avoid triggering an unintentional breach of default under the agreement (and possible liability or related damages).

What if the agreement is silent as to force majeure?

Even in those situations in which a force majeure provision is not contained in an agreement, companies may be able to rely upon the doctrine of commercial impracticability under Section 2-615 of the Uniform Commercial Code.  A party to a contract for the sale of goods (as opposed to services) may have its performance excused if the “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.” Even parties seeking to rely on the doctrine of commercial impracticability must notify the other party of the event leading to the impracticability of performance, and, if supply is only partially interrupted, allocate production and supply among customers in a fair and reasonable manner (unless the contract at issue expressly provides otherwise).

In addition, some agreements are subject the United Nations Convention on Contracts for the International Sale of Goods, which may excuse performance where the failure to perform is due to an unforeseeable impediment to performance that is beyond the party’s control.  Agreements may also include a so-called “material adverse change” or “material adverse event” clause which, like a force majeure provision, may excuse performance.

If your company believes its performance under a contract has been or will be impacted by the COVID-19 outbreak, or if you have received or expect to receive a notice from a counter party asserting a right to excuse performance as a result of the COVID-19 outbreak, please contact an attorney at Honigman to assist you with evaluating the situation and the appropriate response.  In any event, it is important to be mindful of the fact that this is a quickly evolving and changing situation.  A prudent commercial response to the COVID-19 outbreak cannot be static and must be continually reevaluated as events and government and regulatory responses change, and new information becomes available.