By Joan M. McGivern, Counsel
With companies across the country and the globe facing business interruptions from the coronavirus (COVID-19), it is time to take stock of your existing contracts.
Which contracts will result in nonperformance and why?
Will your company be the nonperformer or dealing with a nonperformer?
What should your company do in either case? What are your company’s rights, remedies, and obligations with respect to your business partners?
What is a Force Majeure Clause?
The first place to look for an answer is whether the contract has a force majeure clause—and if so what does it say. The phrase force majeure comes from the French; literally translated, it means “superior power.” Given its common law origins, the law in the United States will not read into a contract a force majeure clause unless the parties so provided. In other words, courts of New York will interpret force majeure clauses according to their contractual terms.
Even these clauses’ catch-all phrases will be interpreted narrowly. Phrases such as “and other events beyond the control of the parties” will be restricted to the same type, nature, or class of enumerated events.
Does COVID-19 qualify as a Force Majeure Event?
It depends. Force majeure events are typically split into two categories, one being political risks related to changes in the political or legal environment, including acts of war, riots, strikes, acts of terrorists, changes in the law or regulations; with the other non-political, or events resulting from natural forces, usually “Acts of God” concerning the weather—like hurricanes, tornadoes, earthquakes, and so forth.
What if your contract does not contain language related to diseases but does contain a catch-all such as “events outside the reasonable control of the party affected.” Whether a court will agree that the COVID-19 is an event excusing performance—like an Act of God or by recent acts of the government—remains to be seen.
Presently the U.S. government has declared a national emergency, but does that mean you can tie the coronavirus to your contract’s performance? Do these recent government-related directives actually prevent performance, or simply make it more difficult or less profitable? The latter is not a force majeure; it’s just bad luck.
Are there any bright lines? For example, what about the recent curfews and directives against gatherings of more than 10 that some major cities have enacted? Would that provide an excuse not to hold an event at a certain venue after the curfew? What about the directive to work from home? Does that actually prevent you or your employees from performing on the contract?
What about the recent stock market crash?
Let’s say the recent downturn in the market has made a particular contract less profitable or more expensive to perform? Is the market’s downturn traceable to the COVID-19—a force majeure? Perhaps, but not necessarily.
Put simply, even if a contract has a force majeure clause, that clause will not excuse performance due to financial hardship or a downturn in the market, unless it is specifically spelled out. Even where a lease referred to “any cause whatsoever beyond the party’s control,” that did not allow a tenant to get out of the lease merely due to the downturn in the economy.
In the case of a settlement agreement that provided for buying out an ex-employee at a certain stock price, the company was required to honor the contract even though the stock price had fallen precipitously. Even though the decline in price had made it more onerous to perform the buyout, performance on the contract of the settlement was not excused.
Notice, Notice, Notice!
If you have a force majeure clause, check the notice provisions and comply with them. Or if you have received a notice, check for compliance. Failure to comply has been held an absolute defense to invoking a force majeure. Don’t get tripped up.
What should a Force Majeure Clause Contain?
Given recent events with the Ebola virus and Severe Acute Respiratory Syndrome (“SARS”), and now COVID-19, lawyers have begun adding into force majeure clauses references to pandemics, epidemics, quarantine restrictions, viral outbreaks, and/or infectious or communicable diseases, as well as references to acts of government intervention.
While a good idea, one caveat is that parties to contracts should not just rely on any old boilerplate force majeure clause. Instead you should take the time to consider how it might be tailored to fit your unique contract at hand, and in particular, the foreseeability of risks and how those risks are to be allocated. If drafted correctly, it can be a lifesaver. If not, your company may not be safe from unforeseen pitfalls.
In itself a force majeure clause is a form of risk allocation where the parties agree how to handle unforeseeable risk events: if you’re trying to decide whether to give notice of a force majeure—or have received a notice—ask yourself if it was an event which:
• Is beyond the control of the affected party?
• Could not have reasonably provided against by the affected party before entering the contract?
• Has prevented, impeded, or hindered performance of the affected party’s obligations under the contract? and,
• Is not substantially attributable to the other party?
See Business Interrupted? Part II: What if you have no Force Majeure Clause?