In the wake of the global tumult surrounding the coronavirus, many businesses are asking if this pandemic viral outbreak constitutes a force majeure and gives legal rights to companies to evoke this clause in their agreements and contracts. We have seen an increase in work both on assisting clients who want to enforce contracts and on helping other clients who can’t fulfill their obligations.
Understanding the Force Majeure Clause
Force majeure clauses are contract provisions that excuse a party’s nonperformance under a contract when “acts of God” or other extraordinary events prevent a party from fulfilling its contractual obligations. For reference, most force majeure clauses are enacted when there are events such as war, earthquakes, terrorist attacks, hurricanes, floods, famine, and yes, even epidemics. Courts look to several elements when considering the applicability of a force majeure clause: (1) whether the event qualifies as force majeure under the contract, (2) whether the risk of nonperformance was foreseeable and able to be mitigated and (3) whether performance is truly impossible. The Uniform Commercial Code (UCC) requires that if one party evokes their rights under a force majeure clause the other party has 30 days to respond or the contract will legally lapse.
COVID-19 as a Force Majeure
The coming months will bring many claims of force majeure in response to business closures, travel restrictions, and quarantine. Can this COVID-19 pandemic be considered a force majeure for companies and individuals to invoke this clause under their contracts and agreements? Force majeure clauses are generally interpreted narrowly; therefore, for an event to qualify as force majeure it must be outlined in the clause at issue. Whether such assertions of force majeure will be successful will be heavily dependent on the facts relevant to the particular contracts and businesses at issue.
Ultimately, every case will likely be taken on a case-by-case basis through individual courts. However, if a company or individual is attempting to invoke the force majeure clause, they must show how the pandemic event directly impacted their ability to fulfill their contractual obligations despite all reasonable efforts to do so. Typically, it is never enough for one party to simply claim that it was challenging or difficult to complete their end of the contract, but rather that it was nearly impossible to do so given the circumstances that were completely unforeseeable. Additionally, the party attempting to invoke the force majeure portion of the contract must illustrate how there were no other ways to complete their end of the deal, not just that it would cost more, take more time, or be more challenging to complete. Even if such steps are not successful in avoiding the need to declare a force majeure, a company’s attempt to mitigate its risk in advance will be highly relevant to a court’s determination of whether reasonable steps were taken to continue to satisfy contractual obligations, and whether performance was truly impossible.
If you are a company attempting to conduct business as usual in the face of this global pandemic, you are in uncharted legal territory. However, you should re-read all of your contracts to determine if you, or those you contracted with, may have the legal right to invoke force majeure rights. Attempt to determine if there are any potential contingency plans that either you or your contracting parties could agree upon and see if any possible changes can be made to the original contracts. Determine the locations of all of your contracted parties to see how their states or countries are requiring them to act under the law, which may allow them to invoke the force majeure clause.
Business Interruption Insurance
Business interruption insurance is intended to cover losses resulting from interruptions to a business’s operations, and generally covers lost revenue, fixed expenses such as rent and utility, or expenses from operating from a temporary location.
Several companies were able to recoup losses through business interruption insurance for various operational disruptions after the global outbreak of Severe Acute Respiratory Syndrome (SARS) in 2002-2003. However, many insurers have since excluded viral or bacterial outbreaks from standard business interruption policies. As a result, it is critical for companies to proactively assess the specific terms and conditions of their governing insurance policies to determine whether interruptions from COVID-19 would be covered. In connection with that assessment, companies should review their policies’ insurer notice requirements to ensure their scrupulous compliance with those provisions in the event coverage is ultimately sought. Taking these proactive steps will help companies be prepared for any financial or legal implications that may result from the continued spread of COVID-19.
Finally, understand that as a business owner you are attempting to assess a situation that heretofore has not been addressed in such a way for over 100 years, and in a time where the economy was not nearly so global and connected. The coronavirus COVID-19 pandemic will require the courts to test legal theories that have yet been untested. As a business owner, you should examine all possible outcomes of the contractual relationships you currently have and attempt to determine all of your obligations under the law in all different types of scenarios. In certain circumstances, like those businesses that must travel overseas to complete a contract, the force majeure clause will likely be upheld by the courts. In other cases, it may not be upheld as the ability to fulfill a contract was available, just simply more difficult. Like everyone else in the world now, your company faces an unprecedented time in modern history. Let us hope that the novel legal solutions created from this novel virus prove beneficial to industry, commerce, and businesses.
We hope you are staying safe and healthy in the midst of this crisis. We are here for you, so please do not hesitate to reach out regarding any questions or issues you may be encountering.
