Coronavirus & Force Majeure: What Businesses Need to Know

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By: Dilawar Fazal and Nikita Shah

The coronavirus (COVID-19) has disrupted normal business operations all over the world. As of March 11, 2020, the World Health Organization (WHO) declared the virus as a pandemic. In light of this pandemic, many businesses are unable to perform some of their contractual obligations. Some are stuck with suppliers who are unable to deliver due to factory closures, while others must cancel mass events due to curfews or limitations on group gatherings. In challenging times like these, a key contractual provision is the force majeure clause, which allows one or both parties to be relieved of their contractual obligations based on unforeseen events. Given the increase in international force majeure cases, it is a critical time for businesses to review all their contracts to understand the various force majeure clauses at play.

Purpose of Force Majeure Clauses

Force majeure clauses are designed to free either party of their contractual obligations if an unforeseen event beyond their control leads to delays or an inability to fulfill contract terms.  These events commonly include war, public health events, strikes, government orders, trade embargoes, and other large-scale societal events.

Under most circumstances, the coronavirus pandemic would classify as an unforeseen event outside of the parties’ control, thus excusing performance under a force majeure clause. In fact, by March 3, 2020 China had issued approximately 4,811 certificates, the equivalent of $53.79 billion, to companies that applied for force majeure. This is a direct result of China’s quarantine efforts which resulted in a labor standstill and supply chain disruptions.

This clause can serve as a useful tool to protect companies and individuals from liability resulting from a coronavirus-related contract breach. In addition to a force majeure clause, it may also prove useful to review other provisions related to termination, cancelation, and breach of contract. Adjusting the language of these clauses can change which events are construed as force majeure from a legal perspective, as desired.

What Events Qualify Under Force Majeure?

Whether coronavirus classifies as a force majeure event depends on the language in the contract itself, and surrounding facts and circumstances. To effectively enforce the clause, a company or individual must show that it is impossible to perform the terms of the contract.  They must also prove that nonperformance was unforeseeable and out of the party’s reasonable control. If performing contract terms requires additional time or cost only, it is unlikely the clause will be enforced as it does not show impossibility.

Force majeure clauses are enforced based on local law. International contracts are governed by the choice of law in the contract. If the choice of law is outside of the United States, the governing law will be the listed country.

Protecting Your Business Without A Force Majeure Clause

If your contract does not include a force majeure provision, you may still be excused from performing contract terms under three different legal principles:

  • The frustration of purpose doctrine applies when some unforeseeable event or circumstance, to no fault of either party, undermines the principal purpose of the contract.
  • The doctrine of impracticability applies when some event or circumstance causes performance of the contract to be infeasible or expensive based on the shared assumptions under which both parties entered the contract.

Finally, the doctrine of impossibility applies when changing circumstances make contract performance impossible. This doctrine is the most difficult to prove, as there are very few events which render performance impossible.

COnclusion

The impact of force majeure clauses will increase as the US faces additional travel bans and restrictions, businesses continue to close their doors, and the number of people quarantined increases. Courts generally look for three elements when evaluating force majeure clauses: (1) whether the event qualifies under the contract, (2) foreseeability of the event and the ability of parties to mitigate its effects, and (3) impossibility of performance. Businesses should meet with an experienced attorney to review their policies and take proactive steps to protect themselves in the event of contract nonperformance.

For help reviewing your contracts and understanding your force majeure rights, please email us at info@chugh.com.We also encourage you to share this alert with relevant contacts.

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