With the World Health Organization (WHO) declaring the novel coronavirus (also known as COVID-19) a “pandemic” on Wednesday, March 11, 2020, there undoubtedly will be significant impacts on the ability of businesses around the globe to maintain operations and fulfill contractual obligations. As governments order the shuttering of “nonessential businesses” and hundreds of millions of people have been ordered to work from home or cease work entirely, businesses in all sectors that depend on manufacturing operations and alignment of supply chain for success are (and will continue to be) among the most heavily impacted by this unprecedented event.
While the virus’s impact on a particular contract will be fact-specific and may depend on the governing law, a close review of any force majeure clauses and consideration of the doctrine of commercial impracticability under Section 2-615 of the Uniform Commercial Code (U.C.C. or Code), as well as the common law defenses of impossibility and frustration of purpose, are two advisable steps when confronted with reduced or suspended supply of critical goods. Whether you are weighing recovery options or defending against potential claims of breach, these are important concepts to consider as companies face further supply chain disruption resulting from the coronavirus outbreak.
Force majeure clauses
A force majeure clause is a contract provision found in many commercial contracts that excuses a party’s non-performance of its obligations when extraordinary events beyond the parties’ control arise. Many courts have construed force majeure clauses narrowly, such that a party’s performance under a contract will ordinarily be excused only if the event preventing the party’s performance is explicitly mentioned in the clause itself. While some force majeure clauses may specifically identify “flu, epidemic, serious illness or plagues, disease, emergency or outbreak” as events that would excuse a party’s performance, most force majeure clauses include more general language covering “acts of God,” “acts of government,” “matters beyond the parties’ control” and other similar catch-all phrases. The relief under a force majeure clause, therefore, will depend on the specific language in your contract and the underlying facts and circumstances.
The WHO’s classification of the coronavirus as a “pandemic” likely would trigger a force majeure clause that expressly accounts for “pandemics,” “epidemics” or “viral outbreaks” (depending, of course, on the precise contractual language at issue). A force majeure clause that mentions “acts of government” more generally also could arguably apply to the coronavirus now that cities and states across the U.S. are ordering the closure of “nonessential businesses” and implementing travel, movement, and large-gathering restrictions. But force majeure clauses that are silent on “pandemics” (and similar public-health related outbreaks) or “acts of government” are likely to be insufficient for a force majeure defense based on the coronavirus crisis unless courts lower the historically high bar for invoking force majeure to account for current market realities.
Generally speaking, a party invoking the protections of a force majeure provision must demonstrate that:
- the event at issue falls within the scope of the force majeure clause;
- the precise event preventing full performance under the agreement was unforeseeable in light of the contract;
- it could have performed but for the triggering event;
- the failure to perform could not have been avoided or overcome through alternative means; and
- it complied with the contract’s notice requirements.
Even if a party can establish these elements, it typically cannot invoke force majeure if it did not take steps to mitigate the damage and performance is merely impracticable or economically difficult rather than truly impossible (unless the governing law or contract at issue applies a different standard).
For a full examination of force majeure and the novel coronavirus, please see our related alerts.