May 04, 2020
With the economy basically stemmed by the COVID-19 pandemic, owners are having an incredibly difficult time carrying on “business as usual”. With many industries slowed—and in some instances, completely brought to a halt—many owners are struggling to fulfill their obligations under their current business contracts.
Of course, a business contract is a legally-binding written commitment. However, in the midst of an extraordinary or unusual event (for instance, a global pandemic), are the involved parties still expected to honor the agreement? The answer oftentimes involves what are called force majeure clauses.
A force majeure clause is a contractual term mandating that in the event of something “extraordinary”, all involved parties may be freed from their obligations under the business contract. Defining what qualifies as a “force majeure event” is tricky and a frequent point of contention, but historically they’ve included acts of war, acts of terrorism, epidemics, acts of government, natural disasters (ie. “Acts of God”), and labor disputes.
Practical Tips for Owners that may Invoke Force Majeure
For owners struggling to fulfill their legally-binding contracts amid the unpresented COVID-19 pandemic, relief may be found in their agreement’s force majeure clauses. However, before invoking force majeure, an experienced attorney must be consulted, as an ill-advised claim may in-fact do more harm than good:
1. Review your Contract In-Detail: some well-written contracts include detailed clauses that specify exactly which types of events qualify as force majeure. Conversely, other agreements lack any such language. In terms of COVID-19, a contract that mentions pandemics or disease puts owners in a good position to invoke force majeure. Other language like “Act of God” or “Circumstances beyond reasonable control…” may also be sufficient to include COVID-19, but it’s a bit more up to interpretation.
2. Form your Claim: with your attorney’s guidance, explicitly list the parts of the contact that cannot be satisfied and ensure that your inability to perform is a consequence of the COVID-19 pandemic (and not for some other unrelated reason). A quick note: the non-performance can be the result of COVID-19 itself or something indirectly related to the pandemic, such as a government order that hinders your business’s ability to operate. Nonetheless, general economic hardship isn’t enough to qualify as force majeure, so ensure your non-performance is clearly attributed to the pandemic.
3. Evidence your Claim: an important aspect of a successful force majeure claim is providing evidence that you’ve taken measures to mitigate or avoid the impact of the event. Put another way, businesses can’t simply disregard their agreements once the pandemic hits; rather, they must show they’ve tried to operate through the hardship, but the extraordinary circumstances make it impossible or unreasonably difficult to fulfill their business commitments.
4. Re-Evaluate the Scope of your Force Majeure Clauses: force majeure provisions—depending on how they’re phrased—can vary in scope. For example, some clauses release parties from all debs and liabilities indefinitely while others only provide temporary relief. Whether the performance is completely excused or only provisionally delayed will depend on the phrasing in the contract. Furthermore, for how long will the force majeure be in effect? In other words, at what point will things be considered “normal” once again? This will also depend on the language of the agreement.
5. Check your Contract for Notice Requirements: some contracts will require certain notification documents be served to the counterparty before a force majeure can be invoked. Exactly when these notices must be sent depends on the terms of the contract. Likewise, these supporting documents can take many forms and the specifics should also be outlined in the agreement.
6. Keep an Open Line of Communication: of course, this should be up to the discretion of your legal representative, but keeping the counterparty informed is a generally pragmatic approach. This includes giving them timely notice if you’re planning to invoke force majeure.
7. Maintain a Record of Events: although not legally mandatory, it’s smart to keep a detailed day-to-day record of events throughout the process. The record could include things like important dates, notices that were served, or general correspondence. These notes may come in handy if the force majeure event is contested or results in future litigation.
The Bottom Line for Concerned Business Owners
The above tips are certainly a starting point for owners worried about fulfilling their contractual obligations amid the COVID-19 outbreak, but they are no substitute for consultation from an experienced legal professional. A knowledgeable attorney can review your contract and offer a realistic outlook on whether invoking force majeure is in the best interest of you and your business.
Remember, haphazardly relying on force majeure clauses may cost owners both time and money in the long run. Wrongful claims can ultimately result in breach of contract, along with the various consequences involved with contract violation. Perhaps fortunately for owners, the strength of a force majeure claim largely depends on the language of the contract; well-written, detailed clauses—especially those that mention pandemics or diseases—increase the chances of COVID-19 being considered a qualifying event.
Finally, it’s important to reiterate that the COVID-19 itself need not be the direct cause of your inability to perform. In-fact, some anticipate that the majority of force majeure disputes may instead be caused by a Coronavirus-related government order, such as limitations on gatherings or the forced closure of particular facilities.
