Is Coronavirus a Force Majeure Event?
As the threat of Coronavirus (COVID-19) intensifies, so does its effect on business and industry. During this time, it is prudent to begin planning for a significant disruption in business as usual, including a review of your contracts’ force majeure provisions. A force majeure provision defines occurrences that are outside and beyond the control of the parties (acts of God, war, famine, and plague (epidemics and pandemics)), and may permit relief for non-performance in the event of such an occurrence. The possibility of the virus triggering a force majeure event increases as the Coronavirus continues to spread. Parties should be aware of the following to ensure that they are comfortable with the terms of their contracts in the event that COVID-19 triggers a force majeure event.
Definition of force majeure:
A force majeure event can be defined to include a laundry list of items which are not (and often times, cannot be) anticipated as of the date of the contract, are beyond the party’s control, are not caused directly or indirectly by the fault or negligence of the other party, and which prevent or delay the affected party from performing its contractual obligation(s). The list may specifically include “epidemics” and in some cases “pandemics” as events of force majeure. Some definitions of a force majeure event do not specifically include a laundry list of items, but may be drafted broadly to leave open to interpretation about whether COVID-19 would qualify as a force majeure event. For instance, the definition of a force majeure event may cover “any other causes beyond the party’s control.”
Regardless of how a force majeure event is defined, it is important to also confirm whether any contractual exclusions might apply to the circumstances and if any other contractual requirements have been met. For example, a party may be restricted from claiming force majeure for something that is impacting its agents, contractors, subcontractors, vendors, or suppliers, but not directly impacting the party. The disease itself may not cause the force majeure event, but the force majeure event may be that agents, contractors, subcontractors, vendors, or suppliers or even the company employees are unable to fulfil their duties, because they are either quarantined or ill or caring for someone who is quarantined, ill or potentially exposed to the virus.
Consequences for a force majeure event
While relief under a force majeure event depends on the specific terms of the contract, relief could include: (1) termination of the contract without liability; (2) relief from the performance of contractual obligations; (3) an extension of time for any obligations to achieve milestone dates or deliveries; and/or (4) relief from the contract price. With respect to the contract pricing, the contract may allow for an increase to the contract price for all reasonably incurred costs arising from the force majeure event and some may allow for partial compensation for increased costs of performance. COVID-19 already has demonstrated an impact on the global supply-chain. The future impact on supply is uncertain at best, but COVID-19 could dramatically impact the availability of goods and product. Therefore, it is best practice for businesses to be aware of the consequences of a force majeure event to help prepare for an impact on business operations.
It is important to note that contracts often have a procedures to be followed when invoking the force majeure clause. Such mechanisms could include providing the other party with notice within a specified timeframe and if you fail to notify the other party of a force majeure event within the requisite timeframe, you may be excluded from force majeure relief. So, in the course of setting out a contingency plan, companies should be mindful of any timelines and other requirements to claim force majeure relief.
If your company currently is involved in contract negotiations, reasonably foreseeable or anticipated events may be excluded from the force majeure definition. Therefore, it is important for companies to have a reasonable understanding on the impacts that COVID-19 may have on the ability to fulfill its contractual obligations. If it is reasonable to foresee potential schedule delays and cost increases, it may be prudent to include a cap for cost overruns or limit the permissible relief to extensions of time to perform certain obligations. Note that if you agree to a scheduling change, it is prudent to evaluate other contracts that may be affected by this change to ensure that all contracts are working cohesively.
“Boilerplate” provisions often are included at the end of a contract and are easy to skim past. COVID-19 provides your business with the opportunity to review the force majeure provisions and draft language that best prepares your company in the event of these extremely rare occurrences.
Please contact Parker McCay’s Corporate Department to discuss the review of your contractual provisions.
The content of this post is for informational purposes only and should not be construed as legal advice or legal opinion. You should consult a lawyer concerning your specific situation and any specific legal question you may have.