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March 20, 2020

Force Majeure Clauses Amid the COVID-19 Response

With the unprecedented events unfolding during the COVID-19 outbreak, many businesses already have or will be in situations where they’re unable to meet contractual obligations. As a result, many business may start looking at a relatively standard but infrequently invoked contract provision known as force majeure (FM).

Again, while most standard contracts contain these FM provisions, most businesses hardly pay attention to them because they don’t come into play unless there are extraordinary events that prevent contract performance—and we certainly have extraordinary events occurring now. So, the question is whether or not an FM provision will relieve your business of its contractual obligations. The answer depends on a couple key factors, specifically what’s in the contract and what’s the basis for being unable to fulfill it.

While FM provisions typically contain similar language, there can be differences that significantly impact whether and how they may be invoked. For example, some have provisions that specifically identify “pandemics” or “epidemics” as events that would qualify to invoke the clause, and most contain some form of “government action” event (i.e., if the government, by regulation, law, or other action, makes contract fulfillment impossible). Similarly, some contracts require that fulfillment be “impossible” or “illegal”—terms that have significant legal implications in and of themselves—while other contracts may contain language like “impractical” or “inadvisable.”

The courts narrowly interpret the language of FM provisions based on the particular circumstances. So, whether you’re able to invoke an FM provision will depend on the contract language and then applying that particular language to the specific circumstances that prevent performance.

By way of example, if the FM provision stated that contract performance would be excused if a pandemic made fulfillment impractical, the circumstances could warrant invoking that provision because COVID-19 has been declared a pandemic by the World Heath Organization (and possibly other relevant entities), and the business was unable to fulfill the contract requirements based on the number of employees that were required to self-quarantine or who contracted the virus.

Similarly, if the FM provision contains a “government action” provision, you may be able to invoke it if some level of government issues an order closing the business in some way, including ordering all non-essential individuals to shelter in place (which has already begun in certain locations) or, as was just ordered by Governor Cuomo in New York State, that all “non-essential” businesses reduce their work force by 75 percent.

Regarding how to invoke an FM provision, different contracts contain different requirements, but there’s usually a specific form of notice required (e.g., certified mail to a particular individual or address) combined with a requirement that the notice be provided a certain number of days before fulfillment is required.

Ultimately, whether a business can invoke an FM provision will depend on the particular language of the provision and the specific circumstance of why the contract cannot be fulfilled. In this unprecedented time, however, and considering the significant impacts to businesses, it’s worth looking at these contract provisions to see if and how they might apply to your current circumstances.

If you have any questions regarding the content of this alert, please contact Nick DiCesare, partner, at ndicesare@barclaydamon.com or another member of the firm’s Commercial Litigation Practice Area.

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