FAQs: Force Majeure
Q: What are the most pressing legal issues and considerations during the COVID-19 (coronavirus) pandemic?
A: Contract Disputes: the pandemic will make it impossible for some parties to perform their contracts, which will lead many parties to try and rely on “force majeure” clauses to justify the non-performance of contracts. The closure of many businesses and increased caution on expenditure will inevitably mean financial hardship. Companies are likely to face an increase in customers wanting to cancel orders and/or obtain a refund for cancelled events because of government restrictions on travel and social distancing obligations. Companies may also be faced with suppliers unable to complete orders.
Insolvency: Widespread financial hardship and drastically reduced spending will lead quickly to companies facing cashflow issues, and potentially becoming insolvent, entering administration proceedings and needing to restructure existing debt.
Finance and Tax: Individuals, small businesses and corporations affected by the pandemic world-wide will be considering tax relief, payment deferment and government loan assistance programs like the U.S. CARES Act to sustain themselves financially and their business operations.
Q: How are the COVID-19 pandemic and ensuing government actions likely to affect contractual obligations?
A: If you entered into a contract before the Coronavirus pandemic, and cannot comply with it because of the pandemic, you may be able to rely on a “force majeure” clause, or in certain jurisdictions a “force majeure” law. A force majeure clause may excuse a party from breach of contract when the reason for that non-performance of contract is an event beyond its control which may include government measures or emergency responses to the pandemic, as well as a pandemic itself.
Q: Are the current pandemic, or the government measures taken in response, likely to trigger a force majeure clause?
A: In many jurisdictions it is the precise language of the clause, and how it is interpreted that matters. For example, under New York law and English law, a force majeure clause is only triggered by events that are specifically listed in the force majeure clause. Only those events specifically listed will excuse a party’s performance. Therefore, if a clause specifically refers to “pandemics,” “epidemics,” or similar language which could describe the current situation, the COVID-19 pandemic will likely be held to be included in the scope of the clause. Where the force majeure clause may contain broad language or a “catch-all” provision, it is possible that this would be interpreted to include the current health crisis or the government actions taken to mitigate its effects, but a definitive answer cannot be given without seeing the clause and its broader contractual context.
Q: When will force majeure be unavailable to a contract party?
A: The answers to this will vary from jurisdiction to jurisdiction. Often, force majeure cannot be invoked if: (1) the event was foreseeable at the time of signing; (2) performance under the contract was not in fact impossible; or (3) the party seeking to enforce the clause did not reasonably attempt to mitigate damages or exhaust alternatives to nonperformance. Consult commercial disputes lawyers, but be aware that, in many jurisdictions, including New York, the fact of financial hardship is not sufficient to invoke a force majeure clause, though in others it may be. Similarly, under English law, it will usually not be possible to invoke force majeure just because the performance has been made more difficult or less profitable.
Q: What if a contract does not contain a force majeure clause?
A: In many civil law countries such as France and Italy there is no requirement for a “force majeure” clause in a contract as the principle is contained in statute. The precise operation does vary from country to country. In common law legal systems, where a contract does not contain a force majeure clause, parties’ options will vary between jurisdictions. If the contract is under New York law, they may potentially have recourse under one of two common law principles: (1) impossibility, which excuses a party’s performance when the means of performance, or the destruction of the subject matter of the contract, makes performance objectively impossible; or (2) frustration of purpose, which occurs when performance is possible, but when it would no longer provide the affected party with the benefit that induced it to make the bargain. As with force majeure clauses, these doctrines are traditionally interpreted narrowly by the New York courts, so consulting New York based litigators is advised.
From an English law perspective, when the contract is silent and does not contain any force majeure provision, it may be possible under certain circumstances to rely on the common law doctrine of frustration. For a contract to be frustrated there must be a significant change in circumstances, which is not the fault of either party, and which make the contract impossible to perform. In these circumstances, COVID-19 is likely to be invoked as a supervening event in a significant number of contractual negotiations and disputes. For example, depending on the type of contract, it may be possible to argue that either one or both of the government lockdown or the COVID-19 virus itself has frustrated the contract. Long term contracts are less amenable to claims of frustration where the impact of COVID-19 may be severe but temporary. The consequence of frustration is that the contract comes to an end and the parties’ future contractual obligations are automatically discharged.
Q: What type of events qualify as force majeure?
A: Interpretation of force majeure may be wider or narrower in courts of different jurisdictions so it is wise to take legal advice from commercial litigators or contract lawyers in the jurisdiction whose law governs the contract. In countries without statutory force majeure the question will be answered by what is specifically listed in the clause itself. Harder questions arise when the clause includes a term like “Act of God”. There is likely to be significant litigation in the coming years on whether or not COVID-19 qualifies as an “Act of God” in the varied contexts of particular contracts.
Q: What quantifiable impact is sufficient to demonstrate that COVID-19 (coronavirus) had a “material impact”?
A: Whether an event can be said to have a “material impact” on the performance of a contract should be determined by reference to the facts and circumstances specific to each dispute. In many jurisdictions, there is no prescribed statute governing what constitutes force majeure or what level of impact would be considered “material”. Determining this will therefore be a matter of contract interpretation based on how the relevant force majeure clause is drafted.
Q: How does a party prove that it attempted to mitigate or avoid the force majeure event?
A: Whether a party attempted to mitigate or avoid the force majeure event is a question of fact. Accordingly, each party should keep meticulous records of its specific actions taken in an attempt to mitigate or avoid a force majeure event, and consult with contract litigation lawyers regarding how to proceed. As a matter of evidence the burden of proof is with the party invoking force majeure.
Q: Can a party still be sued if a qualifying event occurs, proper notice is given and mitigation occurs?
A: It is still possible that a contract party seeking the benefit of a force majeure clause in response to a potential qualifying event can still be sued despite having given notice and mitigating in a way that party sees appropriate under the contract in question. In short, this stems from such elements of the contract (i.e. what constitutes a qualifying event, proper notice and mitigation) being open to interpretation as between the parties.
Q: What should I do if I receive a force majeure notice?
A: Whether a force majeure notice is likely to be upheld by a court depends on the circumstances. We recommend consulting your litigation advisers on a case-by-case basis. Some jurisdictions, such as England, require strict compliance with the formalities of such notices.
Businesses that have been impacted by COVID-19 would be advised to carefully:
- review their contracts;
- review the force majeure clauses, if there are any, to determine whether the current situation falls within them;
- analyse the notice provisions for invoking force majeure;
- consider any compliance with applicable law provisions; and
- consider whether the contract has been frustrated.
In all cases the analysis should be targeted on the specific contracts and will have to be applied on a case-by-case basis.
Attorney advertising. The material contained in this Client Alert is only a general review of the subjects covered and does not constitute legal advice. No legal or business decision should be based on its contents.
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