As discussed below, in addition to taking steps to manage the human element of the health crisis, businesses should:
- 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;
- timely provide notice of a force majeure event;
- 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;
- 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.
First, because a court or arbitrator will typically only enforce a force majeure clause to the extent it specifically identifies the event that prevents performance, the party invoking force majeure must show that the event at issue falls within the scope of the force majeure clause.
Second, the party may have to show that the precise event preventing full performance under the agreement was unforeseeable in light of the contract at issue and that the risk of the triggering event could not have been allocated in the contract.
Third, the party may have to demonstrate that it could have performed but for the triggering event. In other words, a party isn't excused from performance by a force majeure when it otherwise was unable to perform.
Fourth, the party must show that, despite the event in question, its failure to perform could not have been avoided or overcome through alternative means.
Fifth, the party invoking force majeure must show that it complied with any notice requirements set forth in the controlling contract.
Force Majeure and the Novel Coronavirus:
As the novel coronavirus continues to sweep the globe, the inability to supply parts has forced many companies, including international conglomerates, to suspend production. Does the outbreak of the novel coronavirus constitute force majeure and relieve a party’s failure to perform?
- Does the force majeure clause at issue specifically reference diseases, epidemics or quarantines as triggering events? If so, the chances of enforcement are greater.
- Did the outbreak of the novel coronavirus cause the party’s inability to perform? If a party would not have been able to perform even in the absence of the outbreak, it is unlikely that the party will be able to rely on force majeure as an excuse.
- Is the party able to avoid or overcome the effects of the novel coronavirus through alternative means? The ability to mitigate the effects of the novel coronavirus through alternative means cuts against the application of force majeure as a valid defense.
- Did the party comply with any notice requirements? Even if all other elements establishing a force majeure defense are met, it is unlikely that a court or arbitrator will excuse a party’s failure to timely notice that a force majeure event has been triggered.
The economic effects of the outbreak of the novel coronavirus have highlighted the importance of a comprehensive force majeure clause. While businesses are rightfully concerned with managing the human impact of the public health crisis, they must also manage the financial consequences.
First, businesses should review their contracts to determine their rights, obligations and remedies in the event of diseases, epidemics or quarantines. Particular attention must be paid to any notice requirements set forth in the controlling contract.
Second, businesses should promptly provide notice of a force majeure event to their counterparties. The failure to do so can have devastating effects on the ability to invoke the defense.
Third, businesses should take (and document) reasonable steps to mitigate the impact of the novel coronavirus. While these steps may prove futile, they are essential predicates to mounting a valid force majeure defense.
Fourth, businesses should review their form contracts to ensure that any force majeure clause adequately allocates the risk of non-performance in the event of an unforeseeable calamity. This may include specifically listing diseases, epidemics or quarantines as triggering events.
Client Alert 2020-059