Considering Invoking Force Majeure Clauses in Light of the COVID-19 Pandemic

On January 30, 2020, the World Health Organization declared the novel coronavirus (COVID-19) a “Public Health Emergency of International Concern”. While the effects of COVID-19 did not seem to hit the U.S. economy until March 2020, this has rapidly and drastically changed since, on a local, national, and global scale, for disruptions to businesses and economies across most industries. A result is that many companies have asserted, are threatening to assert, or are contemplating asserting that the COVID-19 pandemic constitutes a force majeure event giving rise to legal, contractual bases excusing or delaying performance under their contracts.

A force majeure clause in a contract typically defines circumstances beyond the parties’ control that can make performance too difficult or even impossible, where the invoking party can potentially be excused from its duties without liability. In commercial contracts, these clauses typically provide a list of specific events that would trigger the clause, such as war, terrorism, famine, natural disaster, epidemics, and government actions, and they often contain catch-all language broadly excusing performance based on significant events outside the parties’ control. Typically, the invoking party is required to provide notice of same to the other party.

Force majeure clauses are interpreted by the language in the contract and by the courts of the state law where the contract is governed and vary by state. Most courts construe force majeure clauses strictly, narrowly, according to their plain language. Typically, a non-performing party seeking to invoke force majeure and avoid its contractual obligations must demonstrate the existence of the event, the unforeseeability of the event, and the causal relationship that the event triggered such party’s inability to perform. Some states further require the invoking party demonstrate that it made sufficient or reasonable efforts to avoid the consequences of the event.

Even if a company is eligible to invoke a force majeure clause, doing so should be seen as a last resort and a defense, or shield, to performance and liability. In instances where such clauses are invoked, typically the contract and the client/vendor relationship with the other party is no longer salvageable, and so it may be beneficial to seek performance or modification under the contract in a way that may be commercially reasonable and mutually beneficial to the parties.

Companies should take proactive steps and measures and review and analyze several factors in preparing for whether to invoke a force majeure clause under a contract, some of which are laid out below.

  1. Review applicable contract(s), applicable provisions (not limited to force majeure), language, rights and remedies, requirements, choice of law, and notice requirements.
  2. Obtain as much information as possible about the force majeure event, any claim, timing, impact, and documentation of all of same.
  3. Consider contingency plans, including alternative means to performance or satisfying contractual obligations, and/or any proactive steps that could be taken with the other party without needing to invoke force majeure clauses.
  4. Manage communications with counterparties, including client relationship matters, informative periodic updates, including your plans and attempts to work within the situation.
  5. Understand local, regional, and national governmental and regulatory actions and restrictions, including relating to public policy, public health, and others, which may be changing on a daily basis during such a crisis, particularly as they may affect your business (and whether you can operate and/or deliver your goods/services and/or complete projects remotely).
  6. Consider that other business may be going through the same processes, whether competitors who are seeking to provide (or excuse) similar services to your client or similar clients, and that your clients may have their own obligations and deliverables to third party end users or end clients, all the more reason visibility and updates to your client should be helpful in seeking to address their issues and concerns and help salvage their business and commercial needs.
  7. Consider the effects of invocation of a force majeure clause, including but not limited to loss of business, potential pre-litigation and litigation fees and expenses if the other party disputes or contests such invocation, and consequences and effects of an otherwise triggered termination provision under a contract or event of default invocation.

Naturally, each company, each client, each contract, under each governing law and jurisdiction, in each industry will have a unique set of circumstance and thus require a fact-specific analysis of the legal and financial implications of invoking a force majeure clause, and so companies considering invoking force majeure clauses should carefully review and consider all aspects of their contracts as they may be affected by COVID-19 related issues with their legal counsel and determine the rights and obligations and best courses of actions in protecting any further potential exposure to risk in the wake of this global pandemic.