The stock market began to feel the impact of the coronavirus (named COVID-19 by the World Health Organization) in earnest this week. No matter what line of business you are in, it is near impossible to go through a day and not hear about the coronavirus. Panic is mounting, the markets are uneasy, and business is forced to pay attention. Businesses are already feeling the direct impact with travel restrictions, event cancellations, supply chain complications, and internal meetings being scheduled in order to plan through scenarios and take precautions. Many businesses have begun to take a closer look at their contractual rights and obligations under force majeure clauses.
A force majeure clause in a contract addresses the unforeseeable circumstances that prevent a party to contract from fulfilling their obligations under the contract. Generally, a force majeure clause will excuse a party’s performance or address how the parties are to respond when circumstances are outside of a party’s control because of, for example, acts of civil unrest, military intervention, war, terrorism, governmental regulations, embargoes, epidemics, fires, explosions, earthquakes, floods, electric blackouts, unusually severe weather conditions, and the always used – hard to define – “acts of God”. Force majeure clauses are often overlooked and generally fall under the boilerplate text that is tempting to pass over near the end of a business contract.
Even though a force majeure clause is generally as boilerplate and accepted without thought, the actual language of force majeure clause will vary from contract to contract. If you find yourself looking at a contract to see if the coronavirus would qualify as a force majeure event, the answer will rest in the precise wording of the force majeure clause itself. If a party claims an inability to perform under a contract because of the coronavirus, but the language of the force majeure clause does sufficiently contemplate a disease outbreak, that party risks litigation for damages from noncompliance or breaching the contract.
While every contract is different, and every situation will present a host of separate issue, the following are some guideposts to follow when a business starts looking at a force majeure clause in a contract and making decisions whether to declare a force majeure event; or, in the alternative, when a business receives a notice of force majeure notice from a supplier or contracting party.
1. Closely review the wording of the force majeure clause to determine whether the current situation is covered. Specifically, words like “disease,” “epidemic,” or “pandemic” would be particularly helpful language in the context of a force majeure necessitated by the coronavirus.
2. Pay close attention to the contractual provisions that must be adhered to in order to declare a force majeure. A force majeure clause will usually establish notice requirements such as time limitations on reporting to the other party once a force majeure event has occurred. Some force majeure clauses may also require the production of evidence or information to be included in a notice of force majeure This should be combined with a review of a contract’s notice clause to ensure that notice is/was properly sent in the format prescribed by the contract.
3. Pay close attention to other clauses in a contract that are often overlooked: clauses that address a contract breach, cancellation or repudiation, and clauses that establish terms requiring the mitigation of damages or delays that are result of the force majeure event.
4. Beware that the force majeure clause, or other clause in the contract, may include a provision that enables termination of the contract if nonperformance continues after a set period of time.
5. If you decide to send a notice of a force majeure event, provide or obtain as much factual information about the claim as possible. Information about the scope of the outbreak, the number of impacted components / supplies / widgets, the number of impacted facilities, support it with data reported by local news articles, provide percentages or quantitative data on the actual impact of your business function, provide data on the duration or impact timing (if known), and provide a plan on how to modify contract performance or resume contract adherence. Error on the side of specific information rather than estimates and projections. If information is unknown, the party declaring the force majeure event should provide supplemental information as it becomes available. In some situations, a statement that the declaration of the force majeure event should not be construed or understood to be a breach, cancellation, or repudiation would be a good idea that cannot hurt.
6. Beware that the notice or declaration of a force majeure may be admitted as evidence in the event of an action for breach of contract. As such, act with caution and seek the assistance of legal counsel in advance.
7. Beware of the law. If you are contractually providing goods rather than services, and are declaring force majeure on a number of contracts, the Uniform Commercial Code requires a fair and reasonable allocation what it is you supply across your impacted customers.
8. In order to preserve healthy business relations, or help mitigate damages, you may need to consider helping the other party find alternative suppliers to help meet supply deficiencies.
9. If you are the recipient of a notice of a force majeure from a supplier, confirm whether there are contractual clauses with your buyers or customers that require you to provide a notice of a disruption or foreseeable delay.
10. Communication and transparent dialogue among parties to a contract is critical. The parties should maintain level-headedness and strive to find solutions.
11. Be active in developing contingency plans.
While the noise surrounding the coronavirus is amplifying, be careful not to fall into the trap of hysteria. And while the threat seems to be increasing at the moment, rather than quelling, think of the declaration of force majeure as a last resort. At this stage of the coronavirus, at least at this time and at least here in the United States, it would be difficult to legally justify the activation of a force majeure (unless a supply chain were severely disrupted because of a direct quarantine or government intervention in China).
Before deciding on whether to declare a force majeure event, it would be wise to seek counsel from a business attorney with experience in contracts and business litigation in order to help identify obligations, challenges, and rights under the applicable contract.
For further information on this topic, contact Curt Mistele.