A contract is arguably the most common legal instrument in a business’s tool kit. Many types of agreements are relied upon each day to define relationships, set expectations, and manage risk. As the outbreak of coronavirus (COVID-19) continues to create uncertainty, businesses are scrutinizing their contracts for hazards and safe harbors. To that end, businesses should be on the lookout for a force majeure clause in their agreements and ought to seek advice about the scope and effect of such terms on their obligations.
What is a Force Majeure Clause?
Whether you are actively negotiating a contract or concerned about a party’s ability to perform under an existing contract, the force majeure clause will play a pivotal role given recent developments. A force majeure clause is a contractual provision that excuses performance by one or more parties on the occurrence of an extreme or unforeseen event. Its principal parts are the language excusing performance, a defined list of events that will permit the excused performance—i.e., the force majeure events—and the steps that need to be taken by the party seeking to “trigger” the provision. Depending upon the particulars of the given transaction, the clause may also exclude specific events from coverage as a means of allocating risk to one party or the other. While each part of the force majeure clause needs to be carefully considered, the primary focus will likely be the list of qualifying events.
Force Majeure Events
The events that qualify as force majeure events, and thus excuse performance under a contract, will be dictated by the nature of the agreement and the industry within which the parties operate. For example, a contract for the delivery of goods may identify certain events beyond the control of the parties that would be detrimental to a supply chain—e.g., certain governmental actions, trade restrictions or labor strikes. A contract that contemplates providing in-person services would include any event that could render such services impossible—e.g., weather phenomena or, appropriately, pandemics. Naturally there will be overlap from one force majeure provision to the next, as there are certain events that upon their occurrence would render almost any contract unable to be performed. Additionally, force majeure clauses may include a number of “catch-all” events aimed at protecting both parties from otherwise unforeseen calamities—e.g., acts of God or any event otherwise beyond the control of either party.
COVID-19 as a Force Majeure Event
Any current contract negotiation must consider whether the continued spread of COVID-19 will impact either party’s ability to perform at some point in the future. Aside from the obvious physical limitations that would occur if stricken by the illness, your business may be affected by specific governmental actions taken to curb the spread of the virus. On March 11, 2020, President Trump announced that he would be suspending international travel from the European Union (ex-Great Britain) to the United States. The proposed ban does not appear to cover the import of commercial goods to the US at this point. For businesses, the ban could prove challenging, particularly if the ban is expanded to cover commercial goods imported from the European Union. Also on March 11th, Governor Gina Raimondo issued guidance urging Rhode Islanders to avoid and not organize events of 250 people or more. Although not a ban per se, the policy may make it difficult for certain parties to meet existing contractual obligations, particularly those that involve hosting or servicing public events. As the impact of COVID-19 on commercial relationships continues to evolve, businesses should do what they can to ensure that the contracts they rely on protect them to the greatest extent possible.
Interpreting the Provision
If a contract contains a force majeure clause, an inevitable question arises: How will it be interpreted? In the United States, bedrock legal principles teach that if a contract’s terms are clear and unambiguous, its terms will be accorded their plain and ordinary meaning within the context of the overall agreement. Some agreements may expressly excuse performance in the event of an “epidemic” or “contagion.” The language of others may be more ambiguous, such as a provision excusing performance due to “government intervention” or “interference by civil authorities.” Courts tend to interpret these provisions narrowly. Expansive categories or catchall phrases (e.g., unforeseeable events beyond the parties’ control) may be construed in the context of specifically enumerated examples that follow. A court’s interpretation will turn on the precise language of the contract.
A written notice requirement is also common component of force majeure provisions. It should be complied with strictly to ensure its viability as a defense to breach of contract. Indeed, a party’s failure to provide prompt notice may be interpreted as an inadvertent waiver.
No Provision? There are Options
If a contract lacks an express force majeure clause, a business should consider whether the impact of an emergency such as the coronavirus might excuse its performance (or that of another party) on the common law grounds of frustration of purpose or impracticability. Note, however, that these are doctrines of limited applicability. An asserting party must typically demonstrate—among other things—that the non-occurrence of a particular condition was a basic assumption of the agreement.
Whether you are in active negotiations or weighing your options under an existing agreement, it is important to consider the impact COVID-19 may have on your transaction. Adler, Pollock & Sheehan advises business in the drafting of agreements, including force majeure clauses, as well as the litigation of commercial contracts. If you would like additional information on this topic or related subjects, please contact Jonathan Cabot (email@example.com) in the firm’s Business & Corporate Practice or Daniel Procaccini (firstname.lastname@example.org) in the firm’s Litigation Practice.