COVID-19 and Force Majeure Clauses
Many organizations may be parties to contracts where the counterparty is seeking to cancel its obligations because of COVID-19. This situation is arising in relation to various commercial relationships, including supply agreements, events planning contracts, and numerous other types of agreements. Here are some considerations to keep in mind for those who find themselves in this situation:
- Does your contract have a force majeure clause or similar language?
- What are the specific terms and definitions in the force majeure clause? Does a viral pandemic fit within that definition? Some clauses are drafted broadly, and provide a non-exhaustive list of events that constitute force majeure. Other clauses are drafted narrowly and specifically define the events that constitute force majeure. Some clauses are drafted to describe the type of effect that the event must have in order to qualify as force majeure.
- What is the governing law in your agreement? Are there specific issues concerning the enforcement of a force majeure clause under that law? Bear in mind that even if the agreement does not include a specific force majeure clause, the concepts of force majeure (such as the doctrines of impossibility or frustration) could be implied under the law applicable to the agreement.
- Was the virus a preexisting condition or foreseeable at the time of contracting? Depending on when the contract was drafted, the virus and the response may have been foreseeable.
- How far in the distance are the counterparty’s obligations due? Is it an event late in the summer, for example, that could still go forward if circumstances change in the next few weeks? Canceling an agreement in reliance on a force majeure clause may be premature in some circumstances.
- Is the virus outbreak genuinely a force majeure event? Consider whether there are real restrictions that would frustrate your counterparty’s ability to perform under the agreement as a result of the circumstances, or whether the viral outbreak merely poses an inconvenience or an impact on profits, which may not be sufficient to qualify as a force majeure event. Consider also whether your counterparty’s nonperformance because of the viral outbreak would constitute a material breach or only a partial breach. For example, can the counterparty still perform under the agreement but with a delay? If so, is their inability to perform pursuant to the agreed-upon timetable material enough to constitute force majeure?
- Is the virus outbreak the real cause of your counterparty’s nonperformance? Consider whether your counterparty would have been able to fulfill its obligations but for the viral outbreak. And assess whether your counterparty has other motivations to cancel the contract as opposed to working out an agreeable resolution.
- Is your counterparty possibly at fault for its noncompliance? Consider, for example, whether the counterparty took voluntary steps that it now claims frustrate its ability to perform under the contract. Or was its nonperformance truly the result of, e.g., government action or other third party acts?
- Did your counterparty comply with any notice requirements under the contract? Assess whether there are notice provisions in the contract for termination, and whether termination due to invocation of a force majeure clause requires compliance with those requirements. Did your counterparty comply?
- What obligations are excused due to force majeure? Consider, for example, whether the invocation of force majeure affects all rights and obligations under the agreement. Are both parties’ obligations tolled or terminated or only one party’s? Are there obligations that survive termination, even in the event of force majeure? Unwinding an agreement may be complicated depending on whether the agreement has been partially performed.
- Is there a way to mitigate damages? Parties often have an obligation to mitigate damages and to perform through alternate means if possible. Consider whether each party is taking appropriate steps to mitigate damages.
- Is there a way that you can negotiate new dates, times, or obligations rather than cancel the agreement?
- Is there insurance that can be utilized to cover losses?
Please visit our COVID-19 resource page for more information.
- Nika AldrichShareholder