Reed Smith Client Alerts

In December 2019, doctors identified a new coronavirus in Wuhan, China - a significant industrial hub - capable of spreading from person to person. Since then, reports have confirmed tens of thousands of cases of the novel coronavirus in China and 27 other countries, including the United States, resulting in hundreds of deaths. And while governments and non-governmental organizations have attempted to contain the spread of coronavirus through quarantines, travel restrictions and bans, their efforts have inadvertently created a second, economic, crisis: labor shortages, factory closures and supply chain disruptions. These massive disruptions have brought a renewed focus on the application of force majeure clauses - which excuse a party's performance of a contract if an unforeseen event beyond its control prevents performance - that are often buried deep in transportation, supply and manufacturing agreements.

Authors: Janet H. Kwuon David M. Schlecker Casey D. Laffey Elizabeth C. Brandon Asha R. Sharma Eoin O'Shea

As discussed below, in addition to taking steps to manage the human element of the health crisis, businesses should:

  1. review their contracts to determine what, if any, rights and remedies they have as a result of the delayed performance of contracts due to force majeure; 
  2. timely provide notice of a force majeure event; 
  3. prepare for potential litigation concerning failure-to-supply issues and the application of force majeure clauses, including by taking (and documenting) reasonable steps to mitigate the impact of the novel coronavirus; 
  4. update form force majeure clauses to take into account, to the extent possible, modern risks to contractual performance, including diseases, epidemics or quarantines.

Force Majeure in General:

A force majeure clause may excuse a party's performance of a contract if an unforeseen event outside the party's control prevents the party from performing its contractual obligations. However, a party invoking a force majeure clause faces at least five hurdles.