Force Majeure Provisions and COVID-19
With the outbreak of COVID-19, companies across various industries are taking precautions, some of which inevitably will result in nonperformance of their contracts. For some, relief from nonperformance may be found in the contracts themselves in the form of a force majeure provision. For others, whose contracts do not contain force majeure provisions, defending a potential breach of contract will be more of a challenge.
What is a force majeure provision?
Generally, the concept of force majeure excuses contractual nonperformance “when such nonperformance is caused by unforeseen events beyond the control of both parties that either make contract performance impracticable or frustrate the purpose of such performance.” Also known as “Acts of God” provisions, force majeure clauses typically excuse nonperformance of a contract for events such as all-natural phenomena that are exceptional, and the effects of which could not be prevented or avoided by the exercise of due care or foresight.
In order to invoke a force majeure clause, there must be a causal link between the force majeure event and the affected party’s failure to perform.
If a force majeure provision does apply, the affected party is excused from its obligations under the contract for at least as long as the force majeure event continues. In addition, termination of the contract may be possible if the force majeure event continues for an extended period of time.
Force majeure provisions may also contain a notification provision, whereby the affected party must notify the other contracting party in a timely manner. Further, it is important to note if the applicable force majeure provision only favors one party—meaning that only one party to the contract can invoke it to avoid performance.
Does COVID-19 qualify as a force majeure event?
Force majeure provisions in contracts won’t necessarily list public health crisis, or widespread disease, infection, or pandemic as excusable events. Instead, many force majeure clauses reference broader categories that qualify as force majeure events, and thereby excuse nonperformance.
For example, provisions might list items such as “acts of God,” “acts of government,” or “other circumstances beyond the parties’ reasonable control.” Under any of these broader provisions, COVID-19 would likely qualify as a force majeure event. The current outbreak contains a naturally occurring component, the virus itself, and a government action component, such as quarantines and other measures to contain the outbreak. Both of these circumstances may be covered under a standard force majeure clause.
What if there is no force majeure provision in your contract?
If your contract does not contain a force majeure provision, nonperformance may still be excused if, for example, the performing party’s principal purpose has been frustrated, or under the doctrine of impracticability.
What to do?
Whether and to what extent these impacts constitute force majeure events will need to be assessed on a case-by-case basis. However, early identification of potential issues and timely efforts to consider and address them will be important.
- Review your existing contracts. Look to see if your contract contains a force majeure clause. If so, see if the provision contains any broad or specific provisions under which COVID-19 may fall. Further, note if the provision only applies to one party’s performance or to specific aspects of the contract performance. If the provision has a formal notice requirement, make sure you are complying with this. If your contract does not contain a force majeure provision, conversations with an attorney or your counter parties may still be beneficial to you when the principal purpose of your contract may be frustrated or become impracticable due to the impacts of COVID-19.
- Pay special consideration to new contracts. When submitting a proposal for new work, consider including a provision that states the proposal is based on current information on availability of materials and labor and price, and reserve the right to amend the proposal prior to acceptance due to any changes resulting from the impacts of COVID-19.
Being prepared to address the impacts COIVD-19 may have on your business relationships and contracts will be an important aspect of managing this crisis. The attorneys at Wilkerson & Hegna are prepared to support business owners and individuals through this crisis, including assistance reviewing contracts and generating creative solutions to manage the relationships behind the contracts.