The rapid spread of coronavirus disease COVID-19 has had a huge impact on businesses around the world. Production losses, disrupted supply chains, and other interruptions to commercial operations are just some of the far-reaching economic consequences of COVID-19 (declared a pandemic by the World Health Organization). While endeavoring to ensure the safety and care of their employees is a priority, companies also may wish to review their English-language contracts for clauses that may apply if a party is unable to perform its obligations. In particular, companies may wish to see if their contracts contain a “force majeure” clause.
What is Force Majeure?
Force majeure typically refers to an exceptional event that is not attributable to and is beyond the control of parties to a contract. Where applicable, force majeure excuses the temporary suspension of a party’s performance or, if the impact of the force majeure event continues for a long period, could potentially entitle the party to terminate the contract. Parties faced with a possible force majeure event, as in other situations involving possible suspension of performance or contract termination, are well advised to consult legal counsel in order to avoid inadvertently breaching the contract by wrongfully relying on the force majeure clause.
There is no doctrine of force majeure at common law. Thus, in contracts governed by the laws of England, the United States, and other common law jurisdictions, the availability of force majeure will depend on the existence of a force majeure clause and the particular terms of any such provision. This circumstance is illustrative of common law contracts, where parties have the freedom (as well as the responsibility) to reach agreement as to the terms of their contractual relationship, on the understanding that courts will enforce those terms and usually will not look beyond the contract to understand and interpret what the parties have intended and agreed.
If the Contract Contains a Force Majeure Clause, How is Force Majeure Defined?
If a contract contains a force majeure clause, parties addressing a potential force majeure event should read this provision carefully. The first step is to examine what events are expressly identified as constituting force majeure. For example, many clauses will say that force majeure means: large-scale political events such as war, rebellion, terrorism, or certain types of governmental action that prevents parties from fulfilling contractual obligations; natural catastrophes such as earthquakes, typhoons, or floods; or other exceptional circumstances beyond parties’ control.
Some force majeure clauses may specifically reference healthcare crises such as an epidemic or pandemic as a force majeure event. If the clause expressly references pandemics (and perhaps epidemics), this likely would trigger the provision in relation to COVID-19, although a party seeking to rely on the clause would have to fulfill any other conditions set out therein, as discussed below. Equally, if the clause specifically identifies restrictive governmental orders, regulations, etc. as possible force majeure events, where governments have implemented various COVID-19-related controls that have affected business operations by limiting people’s movement, travel, and other activities, these actions also might trigger application of a force majeure clause (again subject to compliance by the party claiming force majeure with any other conditions in the clause).
If a contract’s force majeure clause does not expressly reference pandemics or epidemics (or restrictive governmental regulations due to COVID-19), then without more it is unlikely that English, US, or other common law courts would deem the COVID-19 outbreak (or related governmental action) to constitute a force majeure event under that provision. Some force majeure clauses, in the section identifying specific examples of force majeure, contain catch-all language such as “includes, but is not limited to” or “other events beyond the parties’ control,” so that events not specifically referenced in the clause may nonetheless be deemed to constitute force majeure. It is not, however, certain whether a court would consider such other events to be force majeure. Some US courts, for example, construe catch-all language to mean other events that resemble those that are already expressly referenced (thereby potentially excluding additional events that are exceptional but not necessarily similar to those specified in the force majeure clause).
In addition, force majeure clauses typically include language to the effect that the force majeure event in question must not have been reasonably foreseeable when the parties entered into their contract. There is a potential argument that COVID-19 was not unforeseeable given past transnational outbreaks of SARS and MERS, which like COVID-19 are coronaviruses. On the other hand, the magnitude of the ongoing spread and health impacts of COVID-19, and of the resulting governmental actions around the world, is far greater than that of the prior outbreaks. While this difference may militate in favor of the COVID-19 pandemic being deemed to constitute force majeure, ultimately such determination will rest with the courts or arbitral tribunals addressing this issue where disputed, based on the factual circumstances and particular language of the force majeure clause in question.
Other Important Language in the Force Majeure Clause
In addition to the definition of force majeure events, it is very important to review other language in the relevant clause. How, for instance, does the language in the clause characterize the requisite effect of the force majeure event on parties’ performance? For example, some clauses state that force majeure is to apply where a party is “prevented” from performing its obligations; typically, English and US courts construe this language narrowly to mean that the force majeure event rendered performance physically or legally impossible. Other clauses may provide that force majeure is to apply where the force majeure event has “delayed” or “hindered” a party’s performance. While such words may establish a lower standard than “prevented” (insofar as they potentially could be interpreted to mean that a party was unable to perform its obligations as easily or quickly because of the force majeure event), it bears noting that English and US courts do not permit parties to rely on force majeure simply because performance has become more expensive.
Force majeure clauses often include additional terms that should be heeded closely. First, force majeure clauses typically have notice requirements providing that the party seeking to rely on the clause must notify its counterparty party soon after it became (or, in some contracts, should have become) aware of the force majeure event. Fourteen days is a common notice period requirement. Second, force majeure clauses often contain language that a party is to make reasonable efforts where possible to minimize the impact of the force majeure event. For example, a party whose supply chain has been disrupted likely would need to make reasonable efforts to find an alternative supplier. The party should undertake such mitigation efforts even if they entail additional cost because, as noted above, force majeure is not meant simply to protect parties from increased costs when performing their contractual obligations. US, English, and other common law courts can be expected to require parties to comply with these conditions, and failure to do so may well jeopardize a party’s ability to rely on force majeure.
Where a party has reviewed an existing force majeure clause and, with advice from counsel, seeks to rely on this provision, the party should create and maintain documents of the relevant circumstances (for example, correspondence and other communications concerning the force majeure event and how this event has prevented or otherwise affected performance of contractual obligations, as well as any mitigation efforts). Such documentation is important to support entitlement under the force majeure clause, as well as provide evidence if the counterparty disputes the application of force majeure.
When drafting new contracts, parties should consider whether and how to address the risk of COVID-19. Given the experience of the past few months, it may be difficult to argue that any COVID-19 outbreak in the future was not reasonably foreseeable, as required under most force majeure clauses (hence even express reference to “pandemic” or “epidemic” in the clause might not cover the impact of a future COVID-19 outbreak). Under the common law, however, parties are free to agree other language that, either in or outside the context of a force majeure clause, could address this contingency.
As discussed above, in contracts governed by the laws of England, the United States, and other common law jurisdictions, the interpretation and application of force majeure clauses will depend on the language of those clauses. Whether due to the effects of COVID-19 or otherwise, parties facing events that potentially trigger force majeure clauses are well advised to consult counsel as they consider whether such provisions may indeed apply.
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The information provided in this article does not, and is not intended to, constitute legal advice and is for general informational purposes only. Readers of this article should contact an attorney to obtain advice with respect to any particular legal matter.