This 3-part series provides the basics on evaluating force majeure clauses likely found in the agreements and contracts used by privately held and family-owned small and medium sized companies.
Part 1 describes the steps to determine whether your agreements contain applicable force majeure language; Part 2 takes a deeper look into the definition of the terms in typical force majeure clauses and whether the coronavirus allows nonperformance; and Part 3 guides you through the decision process on whether invoking a force majeure clause is best for your situation.
4 Steps to Force Majeure
[Part 1 of 3 in the series “Contracting & Coronavirus”]
Is the novel coronavirus (the disease known as COVID-19) effecting your business? After less than a week of school closures, cancellation of spring sporting events, and empty grocery store shelves, it is apparent that the outbreak of the coronavirus is impacting commerce. For the foreseeable future, companies will be faced with decisions regarding supply chain disruptions, changes within the labor force, and how best to protect employees from contracting the virus. The ability to invoke a force majeure clause in a contract based on the coronavirus may become a vital part of a company’s ability to survive the current economic conditions.
This article is designed to assist the CEO, President, and General Counsel in determining whether the company’s contracts contain applicable force majeure language. Here are the steps to take in determining whether the coronavirus might constitute a force majeure event in your company’s agreements:
STEP 1. Check Your Agreement for a Force Majeure Clause.
Take a few moments to review your agreements to determine if they include a force majeure clause or similar provision. A force majeure clause generally states that a party may be excused from some or all of its obligations if certain events or circumstances beyond a party’s reasonable control have occurred. Most clauses list a series of examples of types of incidents or circumstances deemed to be force majeure events. Additionally, some provisions will excuse performance for the duration of that force majeure event and some will continue to excuse the performance for a reasonable period thereafter.
If the contract does not contain a force majeure clause, relief may still be granted on other grounds, such as supervening events or failure of a condition. Of course, it is always best to have your general counsel or business attorney review the exact wording of your contract to determine its reach.
STEP 2. Does it Include the Coronavirus?
You found that your agreement includes a force majeure clause or similar wording; now what? The next step is to determine whether the coronavirus is included in the definition of force majeure event. Examine the specific language in the force majeure provisions to determine whether the clause includes a pandemic, epidemic, public health emergency, outbreak of communicable disease, or another similar occurrence as a force majeure event.
If your provision does not use the aforementioned language, consider whether another term might logically include the coronavirus outbreak. General force majeure language often reads, for example, “any act of God, such as but not limited to; war; riot; civil strife; act of terrorism, domestic or foreign; embargo; governmental rule, regulation or decree; flood, fire, hurricane, tornado, or other casualty; earthquake; strike, lockout, or other labor disturbance; the unavailability of labor or materials…”, etc.)” The aforementioned events in italics may fall with the scope of the force majeure provision eventhough they occur as a result of the coronavirus pandemic.
STEP 3. What is the Reason for Nonperformance? Is it truly the Coronavirus?
Causation is a legal theory that explains the relationship between a party’s conduct and the resulting effect. Before deciding that the force majeure provision will apply to the coronavirus situation, check whether causation can be established between the coronavirus and the effect or injury. The party seeking relief from the contract must not be able to perform because of the coronavirus. For example, if a widget manufacturer cannot manufacture widgets because all widget ingredients are also used to make hand sanitizer, and the government demands that all ingredients must go to the production of hand sanitizer and not widgets, then the widget manufacturer cannot legally manufacture widgets. On the other hand, if the widget manufacturer could not have manufactured the widgets anyway because their machine was broken; then causation cannot be established and force majeure cannot be evoked. Each company’s situation will be different, and any determination must be sensitive to the particular facts.
STEP 4. Exceptions or Exclusions.
Unfortunately, your agreement may contain exceptions or exclusions to its force majeure provisions. A further review of the language of your agreement could unearth exceptions or exclusions around payment terms and obligations, or regarding whether certain events may have been foreseen or prepared-for. Some of this language may negate the entire effect of the force majeure provisions at worst; or at best, it may limit the nonperforming party’s recourse.
A very common exception or carve-out is around a party’s obligation to pay timely for goods and services received. In these cases, no matter the severity of the force majeure event, payment will be due in full and on time. Your General Counsel can help you determine if your provisions are precluded by an exception.
Part 2 of this series will take a deeper look into typical force majeure clauses and whether the coronavirus allows nonperformance. The timeliness of the agreement and the standard set forth in the force majeure provision will be considered. If you need assistance determining whether to invoke a force majeure clause, please reach out to us at firstname.lastname@example.org or call or text us to schedule a free consultation at 484-801-0021.
Janelle Snyder Peyton is the CEO and Managing Partner of Snyder Law, an award-winning boutique law firm providing the highest quality general counsel and intellectual property legal services to companies at predictable and reasonable rates via a service called Scribe®. The firm offers brand building strategies through corporate and intellectual property law, including business entity formation, contract drafting and review, joint venture agreements, trademark and copyright protection, and licensing & franchising.