Force Majeure: Calculating Risk During the Coronavirus Outbreak

While the first and foremost concern of the current global health crisis is the safety of people across the globe, it is undeniable that that the coronavirus outbreak is having damaging economic repercussions. Factory closings, transportation restrictions and widespread attempts at “social distancing” have come together to cause shortfalls of both supplies and labor, while reducing the demand for services. As a result, the global supply chains and service industries that undergird the US economy are being disrupted.

Due to these disruptions, it is essential that business take a moment to assess their current obligations in order to understand the extent of their rights, remedies and obligations with respect to their business partners. Both suppliers and servicers who are now unable to deliver on contractual obligations must determine what provisions, if any, may protect them from a default. On the other side, recipients encountering delays from suppliers unable to deliver, or servicers whose services may no longer be desired/needed, must also determine how to move forward in these circumstances. Lastly, commercial leases will require scrutiny as retailers across the nation are facing reduced demand that could jeopardize their ability to pay rent.

Accordingly, businesses should review the contracts underlying their commercial relationships to determine who bears the risk for the impacts of the coronavirus outbreak and, in particular, focus on the extent to which an agreement includes a force majeure clause.

In layman’s terms, force majeure is an unforeseeable event or act that falls outside the scope of either party to an agreement’s control, commonly referred to as “an act of God,” and prevents either or both sides from fulfilling their obligations under a contract. Examples of force majeure events may include earthquakes, hurricanes and other natural disasters, terrorism, government acts, labor strikes, and even pandemics.

Whether a party can be excused from a contract on account of force majeure is a fact-specific determination that will depend on the nature of the party’s obligations, the specific provisions of the contract, and the foreseeability of the events predicating the business interruption. More specifically, in the context of a coronavirus outbreak, the parties’ obligations will depend on, among other factors:

  • the extent to which the parties’ contract provides for suspension of performance (or termination of the contract altogether) as a result of force majeure;
  • the factors that the contract requires must be considered in determining whether a force majeure event has occurred;
  • the extent to which the outbreak actually prevented the party asserting force majeure from performing; and
  • whether the party asserting force majeure had the ability to foresee and then mitigate the effects of the event and its ability to perform under the contract.

Applied to the current outbreak of COVID-19, determining whether a force majeure provision applies requires multiple level of analysis in reviewing the contractual language itself. Does the contract have a force majeure provision? If so, under what terms does it excuse delay or nonperformance? What specific events does it identify to excuse performance? Does it include an epidemic or a pandemic, and does it reference a standard such as the World Health Organization? What about an act of God? If the contract defines an “Act of God, that definition will control. Courts have been reluctant to reduce the term “act of God” to any sort of precise or technical definition; however, the explanation they provide generally involves an unusual and irresistible force of nature which man cannot resist.

A key consideration to keep in mind is that the mere existence of force majeure provision alone might prove insufficient to relieve a business of its obligations under contract. Courts have long been hesitant to read anything more into a force majeure provision than what is plainly articulated in the clause itself. Indeed, a force majeure provision that does not include a clear reference to a pandemic or government mandated shut down in response to one could leave many businesses without a contractual remedy. As a result, businesses may need to look to extra-contractual remedies such as impossibility/impracticability or frustration of purpose, which we will cover in a separate piece.

In light of the above limitations, and the fact-specific determinations that come with asserting a force majeure contract clause, businesses should be encouraged to consider whether there are alternative means to resolve performance disputes. For example, businesses may want to consider whether the other party to the contract would agree to adjust each party’s performance obligations, including but not limited to partial performance, in an effort to mitigate the economic fallout caused by COVID-19.

Indeed, business solutions to legal issues, such as a mutual agreement to shift obligations to a time after the crisis is over, may be preferable – and more cost effective – than calling a default or pursuing litigation for breach of contract. In that event, both parties will likely want to encourage full performance (and maximum attendance) by sitting back down at the bargaining table to negotiate a compromise that may lead to the best result.

As always, we at Tamkin & Hochberg, LLP are ready to help you navigate these unchartered waters and determine your rights and obligations with respect to any contract you believe may be in jeopardy. Please do not hesitate to reach out to us regarding any issues your business might be experiencing, as our office remains open and our attorneys are available.

This memorandum is provided by Tamkin & Hochberg LLP for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.