We are currently receiving a lot of questions like this from our clients. Can companies temporarily (or permanently) be excused from performance of their contractual obligations due to the coronavirus and all of the Federal, State and Local Government orders limiting activity, and “shelter-in-place” mandates?
As is often the case with legal questions, the answer isn’t black and white – it depends. The term “force majeure” does not have a recognized meaning under the law. As is common with questions of contract interpretation, Courts will look to how the parties have defined the term “force majeure” and will next consider the wording of the relevant contractual clause agreed by the parties to determine its effect.
Is there a Force Majeure event?
The first question is, what is defined as a force majeure event in the contract? Most basically, force majeure is defined as any circumstance not within a party’s control. However, in our experience, many contracts will include a specific list of events which are said to constitute force majeure. (For example, natural disasters, Acts of God, terrorism, war etc.) However, most commercial contracts fail to specifically reference epidemics, pandemics and quarantines in their force majeure clauses.
It seems clear that the spread of COVID-19 is an event outside of a party’s control and is therefore likely to come within the definition of force majeure if the parties have simply provided that force majeure is any event that is outside a party’s control. If, however, the parties have a limited and closed list then it will depend upon the events specified in the contract. If the contract includes pandemics, epidemics or quarantine then it will almost certainly be applicable given that the World Health Organization declared COVID-19 a pandemic and several states are now imposed quarantines in attempts to contain the spread of the virus.
However, it may also be possible that such circumstances will be caught by the force majeure clause if it applies to any act of any government or regulatory body where such bodies impose restrictions in response to the COVID-19 outbreak, such as travel bans or enforced quarantine zones or periods.
What is the effect on your contractual obligations?
Again, the specific wording of each clause must be considered on its own merits, but usually force majeure clauses require the party affected to be prevented from or delayed in performing its contractual obligations.
It is important to check the notice provisions of any force majeure clause to check whether a notice is required, when it is required and what information it must contain. This varies from contract to contract.
If a party has failed to give the required notice, then the party may not be able to rely on the force majeure clause.
Risks of wrongfully declaring force majeure
It is worth noting that if a party declares force majeure when it is not entitled to do so, it may find that it is in breach of contract. Therefore, it is necessary to proceed with caution when relying on a force majeure clause.
Force majeure scenarios will always be very fact-sensitive and highly dependent on the wording of the relevant contract. If in doubt, Contact us.