Force Majeure clauses
Force majeure clauses are receiving renewed scrutiny in light of the COVID-19 pandemic. Force majeure clauses are common contract provisions that excuse a party’s performance upon the occurrence of certain specified events, such as natural disasters, civil unrest, or disease, or when “acts of God” prevent or delay a party from performing its contract obligations. Force majeure clauses are commonly included in supply contracts, manufacturing contracts, construction contracts and commodity contracts, and may also be included in retail leases or other types of agreements where the supply of goods, materials, or labor may have an impact on performance.
Force majeure clauses will likely have different language, and each must be interpreted in accordance with its plain meaning and in the context of the whole agreement. Interpretation will focus on whether the clause includes the type of event or occurrence the nonperforming party claims. Most courts will interpret force majeure clauses narrowly, such that if an event is not clearly set forth within the clause, it will be excluded from its scope. For example, if the force majeure clause limits triggering events to natural disasters such as earthquakes, it is unlikely that a court would interpret such a clause to excuse performance based on the outbreak of a disease.
If an event falls within the scope of the clause, the party relying on the clause must prove that the event was not a foreseeable risk of nonperformance. In other words, the risk must be unforeseen. For example, if a lumber supplier knew that a source of timber had a high risk of loss from seasonal wildfires, a shortage of timber due to wildfires would not excuse performance under a force majeure clause, and the supplier would be expected to provide timber for its customers from other sources.
Finally, it is important to understand which jurisdiction’s law governs the agreement. In most jurisdictions, the party invoking force majeure will be required to prove that performance during the event was truly impossible. In these jurisdictions, courts will not excuse performance if it is simply financially more difficult to perform the agreement. In other jurisdictions, courts may excuse performance if it is simply impracticable.
Impact of COVID-19 and Mitigation
The COVID-19 pandemic has already affected global supply chains, has caused market dips, event cancellations and declining retail sales, and has had other adverse economic effects. As the outbreak spreads, the impact on businesses of all types will only increase, and parties may seek protection from these clauses.
We have already seen that COVID-19 will result in quarantines and travel restrictions, including the mass quarantines and restrictions occurring in China, Italy and the United States at the time of this writing. These quarantines and restrictions will result in lost productivity, supply and demand problems and volatile markets, and may result in a long-term recession.
It is likely that parties will begin to invoke the force majeure clauses in their agreements in response to the COVID-19 outbreak, if they have not already. In order to avoid disruption to your businesses, we recommend that you review your business agreements as soon as possible to assess whether they create any risk of non-performance or provide a temporary excuse for non-performance. Mitigating risk may require obtaining alternative suppliers or shifting travel schedules, among other things. We urge clients to plan accordingly.
COVID-19 and Business Interruption Insurance
Businesses forced to shut down due to COVID-19 will be looking to their business interruption policies to cover their losses. Business interruption policies cover items such as losses in revenue and operating expenses resulting from physical property damage. Many insurers have excluded losses related to viral and bacterial epidemics and pandemics from business interruption coverage. Nevertheless, it may be possible to recover under a business interruption policy if a place of business is shut down due to decontamination related to the virus. Likewise, recovery may be available if the shutdown is the result of a civil or military order, such as a mandatory quarantine or travel restrictions. We recommend that you review your business interruption policies closely to determine the scope of the coverage and its availability in the wake of the current business shutdowns as a result of Governor Cuomo’s Executive Order.
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