Contracts & Coronavirus – A Force Majeure Event?
3.2.20
As of February 28, 2020, there have been 84,077 reported cases of the coronavirus, spanning over 59 countries and resulting in 2,876 deaths. That same day, the World Health Organization (“WHO”) increased its risk assessment to “very high” and warned governments not to underestimate the threat. Although the WHO hasn’t officially declared the coronavirus as a pandemic, all signs point to a change in status very quickly. In addition to the quite apparent global economic disruptions and health concerns implicated by the coronavirus, many other industries are raising questions pertinent to their sector. For those in the legal world, a new issue has taken hold: is the coronavirus a triggering contractual force majeure event? (“Force majeure” is Latin for “superior force”; it is a provision in some (but not all) contracts that legally excuses a party from fulfilling, or allows a delay in performance of the contract if such unforeseeable circumstances arise which make performance not possible or practical.)
A growing list of countries across the world have declared the coronavirus outbreak as a pandemic which triggers force majeure events. The French Finance Minister announced that companies can declare a force majeure over the coronavirus when dealing with contracts involving the country’s enterprises. The China Council for The Promotion of International trade, an international trade agency, has started issuing force majeure certificates to Chinese businesses struggling with the effects of the outbreak. In India, the Ministry of Finance has declared that large-scale developers who miss contractual obligation deadlines because of coronavirus disruption can invoke force majeure clauses to avoid financial penalties.
Parties who are or may be unable to perform their obligations as a result of the coronavirus may find a means of suspending or exiting a contract, or using provisions in their contracts as a shield from liability via force majeure clauses. Force majeure clauses define circumstances beyond the parties’ control which may render performance of a contract substantially more difficult or impossible, and which can suspend or release the duty to perform without liability. A force majeure clause can be invoked, excusing performance of obligations due to situations listed in the provision(s), when the events provided in the contract (1) do in fact occur and (2) prevent performance.
Once the force majeure event occurs, the party seeking relief must determine how it affects its obligations under the contract. If the event does not affect the parties’ ability to fulfill their obligations and business can continue normally, the clause cannot be invoked as a defense. In general, force majeure provisions suspend but do not terminate the duties of a party for as long as the force majeure event prevents performance. In more rare situations, successfully invoking a force majeure clause for an extended period can lead to termination of the contract.
The party seeking excuse must prove that the clause should be invoked. Generally, the following prerequisites must be met: (1) the event has to be found within the terms of the clause, (2) the event must have been beyond the control of the party seeking to be excused from performance, (3) it must be determined what effect the event will have on the obligations of the party seeking to be excused, and finally (4) the party seeking relief must provide notice to the other party to the contract.
Even when a contract includes a relief-granting force majeure provision, the occurrence of a force majeure event, by itself, is not enough to invoke force majeure protection. A causal connection must exist between the event and the non-performance. A company must show that the coronavirus directly caused its failure to perform or delay in performance. When it comes to force majeure clauses, the party relying on the force-majeure clause bears the burden of proving that the event was both beyond the party’s control and not a consequence of its own fault or negligence. California law requires courts to apply a “reasonable-control” limitation to each force-majeure event specified in the contract. The California Supreme Court has defined two aspects of that reasonable control limitation: good faith in not causing the excusing event and diligence in taking reasonable steps to ensure performance if possible.
When it comes to the question of whether the coronavirus as it stands right now would trigger a force majeure clause, the answer can only be determined on a case-by-case basis, by reference to the wording in the contract and the circumstances regarding the impossibility to perform. If (and likely when) the WHO declares it a pandemic, those businesses which have listed “pandemic” as a triggering event clause will find much stronger ground to stand on and defend their lack of performance. Companies that are negotiating commercial agreements today should proactively consider the potential risk and consequences of business deterioration resulting from the coronavirus outbreak. Addressing the impact of the coronavirus on a business and its contractual relationships requires a very fact-specific analysis. Businesses must review their contract provisions to determine what events the force majeure language covers and confirm that any notice requirements have been met.
What law governs your contract? Does it have a force majeure clause? Does the clause set out a list of the kinds of scenarios where it would be triggered, and does this include epidemics/pandemics? Does it specify what the outcomes of triggering it will be? Are there alternative ways to perform the contractual obligations? This is a (non-exhaustive) list of relevant questions businesses need to investigate.
Furthermore, a necessary step when invoking a force majeure claim is to provide or obtain as much information about the specific force majeure claim as possible, including the number of impacted parts/facilities where appropriate, and when the event is expected to conclude if determinable. If complete information is not available, or the event may prolong indefinitely, consider addressing the provision to allow either party to terminate the contract after a certain specified time if the duration of excuse of performance exceeds that limit.
For more information and advice on best-practices for an entity that plans to assert its rights under a force majeure clause, please contact Ross Schwartz, Dick Semerdjian, Kevin Cauley, John Moot, Sarah Evans or John Schena.