You Thought It Was Merely “Boilerplate” — the Coronavirus and the Importance of Force Majeure Clauses
With the international spread of the coronavirus and the impact it is having on the supply chains, production, transport, and workforce of commercial entities, as well as the limitations posed for service providers of all kinds, businesses should understand the importance of force majeure provisions applicable to their contracts. “Force majeure” refers to an unforeseeable circumstance that prevents a party to a contract from fulfilling its obligations. Generally, agreements include a force majeure clause in the “miscellaneous” provisions to allocate risk between the parties if one of several named events occurs and performance under the contract becomes impossible or impracticable.
As an example, a force majeure clause typically found in contracts reads:
No party shall be liable or responsible to the other party, nor be deemed to have defaulted under or breached this Agreement, for any failure or delay in fulfilling or performing any term of this Agreement, when and to the extent such failure or delay is caused by or results from acts beyond the affected party’s reasonable control, including, without limitation: (a) acts of God; (b) flood, fire, earthquake, or explosion; (c) war, invasion, hostilities (whether war is declared or not), terrorist threats or acts, riot, or other civil unrest; (d) government order or law; (e) actions, embargoes, or blockades in effect on or after the date of this Agreement; (f) action by any governmental authority; (g) national or regional emergency; (h) strikes, labor stoppages or slowdowns, or other industrial disturbances; and (i) shortage of adequate power or transportation facilities (each, a “Force Majeure Event”). The party suffering a Force Majeure Event shall give notice within [NUMBER] days of the Force Majeure Event to the other party, stating the period of time the occurrence is expected to continue and shall use diligent efforts to end the failure or delay and ensure the effects of such Force Majeure Event are minimized.
Is Coronavirus a Force Majeure Event?
Although the language provided in the sample clause above does not explicitly reference disease, viruses, epidemics, quarantines, or other health-related matters as force majeure events, they certainly may be deemed “acts beyond [a] party’s reasonable control” that may cause interruptions in business and affect a party’s performance under an agreement.
The bottom line is, depending upon the language included in a force majeure clause, a party’s reliance on such provision as protection for its claimed inability to perform as a result of the coronavirus may leave those relying on such performance out in the cold. Conversely, if a party’s supply chains, production, transport, workforce, and/or ability to perform services under an agreement have been impacted due to the coronavirus, such party may need to review its rights under each force majeure clause in its material contracts to determine whether it may invoke the clause as protection against claims for breach of contract.
Alternatives to Force Majeure
Even if a contract does not include a force majeure clause, parties to an agreement may nonetheless be subject to governing laws providing similar relief. For example, a party to a sales contract may look to § 2-615 of the Uniform Commercial Code, which provides that performance of a sales contract may be excused when it becomes commercially impracticable because of (1) unforeseen supervening circumstances not within the contemplation of the parties at the time of contracting, or (2) due to compliance with any applicable foreign or domestic government regulation or order. Similarly, for service contracts, a party may look to the contractual defenses of frustration, impossibility, or impracticality to excuse performance.
Additional Force Majeure Obligations
The availability of force majeure protections does not end the obligations of the parties. Generally, the party invoking a force majeure defense must provide the other party notice. Also, it is important to note that force majeure only suspends performance for a set period, and the non-invoking party may have the right to terminate the agreement after a certain amount of time if performance has not been restored. Finally, a force majeure clause may obligate the parties to mitigate damages should a force majeure event interfere with business expectancy.
What Should Businesses Do Right Now?
The coronavirus will likely affect your business. We recommend that you proactively review your business’s material agreements and analyze your business’s risk and rights under each in the event that a coronavirus-related business interruption occurs.
Further, if your business carries business interruption insurance, which may cover losses caused by disruptions in your business’s operations due to the coronavirus, or contingent business interruption insurance, which may cover losses caused by disruptions to your business’s customers or suppliers, we recommend reviewing your policy to determine the extent of protection such coverage provides.
If you have any questions regarding your risk or rights under any agreement, or if a dispute arises, please contact a member of our Business Section.