Updated March 31, 2020
The cascading effects of the COVID-19 pandemic will reach every industry in one way or another. All over the Pacific Northwest, restaurants are closing or shifting to takeout only, which could affect suppliers. Many brick-and-mortar retailers are either at a standstill or shifting their business online. Many construction projects are stalled as a result of various shelter-in-place orders, and unemployment is increasing. Such developments can strain an organization’s ability to comply with contractual obligations that it undertook with pre-COVID-19 expectations. Whether you are facing increased difficulty in performing your obligations due to the pandemic or your counterparty is facing tough decisions, here are some considerations to keep in mind:
- Does your contract or charter party have a force majeure or “act of God” clause, or similar wording? This type of clause might excuse a party from performing its obligations or delay performance if an event occurs that prevents performance that was beyond the control and contemplation of the parties at the time of contracting. These clauses are common in service contracts, charter parties, and other transportation contracts, but they vary greatly in both their wording and effect, so it is important to pay close attention to the wording of the clause in your particular contract. In addition, the provisions typically require prompt notice to trigger the provision.
- What are the specific terms and definitions in the force majeure clause? Some force majeure clauses are drafted broadly and might provide a non-exhaustive list of events that constitute a force majeure. Other clauses are drafted more narrowly and specifically define what events will qualify. For example, a force majeure clause might exclude the effects of government orders or commercial contingencies, or limit its application to instances where performance is impossible rather than just more costly or difficult.
- What law governs your contract or charter? There might be specific issues concerning the enforcement of a force majeure clause under a particular law. For example, shippers sending goods to and from the United States under bills of lading are subject to the Carriage of Goods by Sea Act, which gives carriers a defense to liability for damages and loss of cargo due to acts of God and quarantine restrictions. Thus, even if your contract does not expressly include a force majeure clause, the concepts of force majeure (such as the doctrines of impossibility or frustration) might be implied under the governing law.
- Was the virus a preexisting condition or foreseeable at the time of contracting? Depending on when the contract was executed, the virus and the response might have been foreseeable. This might affect contracts that were entered into after the virus began spreading but before it substantially affected performance. The more likely it was that the parties could have anticipated the pandemic at the time of contracting, the less likely it is that performance will be excused or delayed.
- What is the timeframe for performance? Is it scheduled to occur late in the summer, such that it could still go forward if circumstances change in the next few weeks? Or does your contract call for performance during a period of a shelter-in-place order that renders performance impossible? The timing of performance will be relevant to determining if a force majeure defense is applicable. Organizations should think about these things in advance, and make contingency plans for alternative performance where possible, and in any event to mitigate any damages.
- Is the virus outbreak genuinely a force majeure event? This will depend upon the wording in the contract, what was known to the parties at the time of contracting, whether the parties made good faith efforts to perform despite restrictions from the virus (mitigating damages), and whether performance was rendered impossible versus just more costly or untimely. A court faced with a breach of contract claim will consider whether there are real restrictions that would frustrate or make impossible 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 might not be sufficient to qualify as a force majeure event. Consider also whether your counterparty’s nonperformance would constitute a material breach—meaning a breach that goes to the heart of performance—or only a partial breach (i.e., a single missed shipment in a service contract). For example, can the counterparty still perform under the agreement but with a delay? This is an opportunity to think about alternatives and contingency plans for performance, as well as to keep lines of communication with the counterparty open. Some contracts allow termination for a force majeure event, some only allow a delay or suspension of performance, and some are silent as to the consequence.
- 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. Again, whether force majeure will excuse or delay performance will come down to the specific wording of the clause or law that applies to your contract and the specific facts of the nonperformance. To excuse performance or suspend performance, the force majeure must be the reason or cause of the nonperformance—not just the excuse.
- Is your counterparty partially 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. Was its nonperformance truly the result of the pandemic, or did it result from a failure to take reasonable steps to mitigate the effects of the pandemic?
- Did your counterparty comply with any notice requirements under the contract or charter party? Many contracts contain notice and dispute resolution provisions that must be followed in the event of a potential breach or as a condition of using the force majeure or alternative dispute clause. Parties should review this carefully, as a failure to provide notice may waive the use of these provisions. The notice might also be a useful tool to opening a dialogue about potential workarounds and amendments that could avoid a breach.
- What obligations are excused or delayed due to force majeure? This will depend upon the contractual language of the force majeure clause or statute. If one party’s failure to perform is material—even if excused—it will generally excuse the other party from performance. But not always. Review the terms of your contract to determine what your obligations and rights are in the event of nonperformance.
- Is there a way to mitigate damages? Parties have an obligation to mitigate damages and to perform through alternate means where reasonably possible. Consider whether each party is taking appropriate steps to mitigate damages. Consult with your counterparty about hardships as they occur and attempt to work cooperatively where possible to avoid a claim of breach. Can you negotiate new dates, times, or obligations to make performance possible? Alternative routes to avoid areas hit hardest by the pandemic? A failure to mitigate may preclude use of the force majeure clause. Furthermore, document your efforts to mitigate in real time—like attempting to locate alternative services, paying more for the services, or accepting service at a different standard.
- Is there insurance that can be utilized to cover losses? Review your policy and consult with coverage counsel.
- Consult legal counsel early, in advance of a breach if possible. Having counsel review your contracts and advise early on your rights and obligations can help you to navigate and hopefully avoid litigation. If notice is required, timely notice might also preserve the use of a force majeure clause or other defenses.
Please visit our COVID-19 resource page for more information.
Molly Henry is a member of Schwabe’s Transportation, Ports and Maritime industry group. She is versed in aspects of maritime law, including casualty response and investigations, vessel attachments and arrests, commercial disputes, marine related regulatory compliance, and more.
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