Numerous businesses impacted by COVID-19 are searching for relief wherever they can find it. Difficult decisions are being made with respect to layoffs, lease or mortgage payments, and federal loan assistance as companies attempt to navigate the current environment. One area generating increased attention is whether a company’s contract provisions create either an obligation or an “out” due to unforeseen events associated with the pandemic. Specifically, an often-ignored term in most contracts called a force majeure clause is now the subject of significant scrutiny (and litigation).
Simply put, a force majeure clause excuses a party to a contract from meeting certain obligations when events beyond the party’s control interfere with its ability to hold up its end of the bargain. Would then a COVID-19-related issue be a valid reason to delay or excuse performance under a contract? Because this is a legal blog, you will not surprised that the answer is: “It depends.”
In this case, the answer to this nuanced question really does get determined by the wording of the contract in question. First, not all contracts contain a force majeure clause. Second, even the ones that do, are not consistently defining the parameters of what unprecedented acts are included. Some go into significant detail about what would constitute an event invoking the clause “act of God, such as earthquake, hurricane, tornado, flooding, or other natural disaster, or in the case of war, action of foreign enemies, terrorist activities, or strikes or labor disputes …” Some force majeure clauses even include epidemics and pandemics as covered events (the Wimbledon tennis tournament, for example).
When courts analyze a force majeure clause to determine if it applies to a certain instance of non-performance, there are typically four key factors: (1) the precise language in the clause, (2) evidence that the force majeure event was unforeseeable, (3) proof of causation between the force majeure event and the resultant non-performance, and (4) evidence that the effects of the force majeure event are so severe that contract obligations cannot be performed.
Courts tend to interpret these clauses narrowly, so we recommend that an analysis of the applicable clause in the contract at issue be made by a legal specialist. Even in the absence of a robust force majeure clause, legal concepts such as frustration and impossibility of performance may serve to relieve a party of otherwise contractual obligations. Further, we recommend a review of existing agreements and contracts to ensure that the standard language you or your company is using is robust enough to reasonably address future events.
Our Litigation and Risk Management team is available to answer any questions you may have about these clauses or other contract issues arising from COVID-19.
This update provides general information and does not provide tailored legal advice or establish an attorney-client relationship.
