Excusable Delay in Your Contracts; Does Your Contract Have a Force Majeure Provision that Includes Pandemics?
Given the worldwide COVID-19 (the novel Coronavirus) pandemic, many businesses are looking to their agreements for situations that may excuse or permit a delay in performance of their contractual obligations. These excusable delays are typically found under a “force majeure” provision.
Force majeure is a contractual allocation of risk. It provides the parties a defense that permits a suspension or termination of performance of the obligations in the particular agreement, provided certain circumstances are met.
What constitutes a force majeure event is typically determined on a case-by-case basis. It is largely dependent on the specific terms and conditions in the contract and applicable law. Consider the following:
Determine if your agreement includes a force majeure provision.
A force majeure provision generally lists specific events that are not “reasonably foreseeable” and beyond the parties’ control. Upon the occurrence of such events, a party will typically be excused from its obligation to perform for the duration of that event and relieve that party from liability caused by such nonperformance.
A party may need to provide notice of the event and non-performance, estimate the duration or take measures to mitigate the impact of delay. This will depend on the language of the provision.
If there is no force majeure clause in the agreement, a party may still seek relief on other grounds, such as failure of a condition or supervening events, impossibility, impracticability, frustration of purpose, or anticipatory breach.
If the agreement has a force majeure provision, would the provision include COVID-19?
Many force majeure provisions include a list of specific events. COVID-19 would likely qualify as a force majeure event if the provision expressly includes a pandemic, epidemic, public health emergency, outbreak of communicable disease, or other similar occurrence.
If specific language is not included, consider whether a more general catch-all provision would include the COVID-19 outbreak, such as acts of God, governmental or administrative action or emergencies, government regulation, disruption to the labor force, unavailability of materials, etc. The party invoking force majeure must be able to establish that COVID-19 falls with the scope of the provision.
Is COVID-19 the reason for non-performance?
In order for a party to benefit from the potential relief under a force majeure provision, there must be a causal connection between COVID-19 and that party’s inability to perform under the agreement. Even if the agreement includes a provision that encompasses COVID-19, this will not automatically excuse performance or relieve a party from liability resulting from non-performance.
Additionally, the standard for force majeure in the provision may require that performance be “impossible,” as opposed to a lesser standard such as “impracticable,” or “hindered.” A party may not be excused simply because the ability to perform has become more difficult or expensive. If a party can still perform in an alternate manner (such as by getting materials or labor from another, more expensive source), it may not be excused from performance.
What exceptions or exclusions are applicable?
An agreement may exclude events that could have been foreseen by a party or that are a result of a change in market conditions. Additionally, the provision may include carve-outs to its application, such as for a party’s payment obligations.
Can the Agreement be terminated?
A force majeure provision may permit a party to terminate the agreement if there is a force majeure event.
Generally, for a party to terminate the agreement due to a force majeure event, the event must delay performance for a specified period of time. Even if termination is possible, a party should consider alternatives before termination, such as potential long-term impacts, the other party’s reaction or ability to mitigate.
The following are additional considerations to take into account when determining whether to invoke a party’s rights under a force majeure provision:
- What are the long-term impacts? For example, a party’s reputation in the industry could be damaged, their industry relationships and connections could be jeopardized, including customers and vendors. While the party was able to relieve some short-term obligations, doing so could jeopardize their long-term viability.
- How will the other party react? The other party may dispute the applicability of the provision. This would likely result in litigation (or other remedies under the agreement). Keep in mind that force majeure provisions are generally narrowly construed by the court.
- What, if any, are the notice requirements to invoke protections under the force majeure provision? A provision may set out specific procedures that a party must follow in order to benefit from the protections of the provision. These procedures may include written notice within a period of time following the event. The notice may include details on the impact and expected delay.
- Does the force majeure event relieve a party of all obligations? Generally, a force majeure event (if applicable) will relieve performance of those obligations that have been prevented by the event. If there are other performance obligations that are not impacted by the event, those obligations may still remain.
- Does the non-performing party have a duty to mitigate? A party may be required to take available and reasonable measures that would lessen the impact and/or duration of the force majeure event. These steps may include finding alternate locations to perform, new suppliers/vendors, or working remotely.
The business lawyers at Murphy Desmond can work with you to address a force majeure provision in an existing contract and can help you with upcoming contracts to help ensure you are protected from liability. Contact our firm at 608.257.7181 or email us at firstname.lastname@example.org.
Published March 30, 2020