Legal Updates

The Coronavirus And "Force Majeure" Provisions In Contracts

Businesses across the globe have been shuttered or disrupted by the coronavirus (COVID-19) pandemic. Entire industries have been shut down, temporarily or permanently. Suppliers of goods and services, finding themselves unable to satisfy their contractual obligations, are seeking ways to limit their liability.

In particular, many businesses are now looking to determine whether they can invoke force majeure clauses in their commercial agreements to excuse temporarily or outright terminate their contractual obligations. At the same time, recipients of goods and services are looking to their contracts to see what rights and remedies they may have where the other party has suspended or cancelled its performance under a contract.

Force Majeure Provisions Generally

A force majeure provision in a contract states that a party will be excused from carrying out its obligations if circumstances arise that are beyond its control and make performing those obligations inadvisable, commercially impracticable, illegal, or impossible. When applicable, a force majeure provision operates to relieve one or both parties of its contractual obligations.

Force majeure clauses are specific to each contract, and determining whether a force majeure provision may be invoked is a fact-intensive inquiry. Typical force majeure events include acts of God (such as severe storms), war, terrorism, acts of government, strikes, and other labor disputes. In some cases, contracts also identify epidemics and pandemics as triggering events.

Governing Principles

In Massachusetts and the other New England states, there are few reported cases construing force majeure provisions in contracts. Court decisions in other states, however, have recognized three general requirements that must be met for force majeure clauses to apply.

First, the contract must refer to the specific event on which the claim is based – such as, in current circumstances, an epidemic or pandemic itself, or an occurrence caused by it (e.g., a government-mandated shutdown).

Second, the alleged force majeure event must make the party’s performance of its contractual obligations impossible, or effectively so, as opposed to merely impractical or more difficult or expensive.

Finally, the party must show a causal relationship between the force majeure event and its inability to perform its obligations under the contract.

As to the first of these principles, the New York Court of Appeals, for example, has held that “only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused.” Kel Kim Corp. v. Central Mkts., Inc., 70 N.Y. 2d 900, 902, 524 N.Y.S. 2d 384, 385, 519 N.E.2d 295, 296 (1987).

The plaintiff in Kel Kim relied on a lease’s force majeure clause as justification for terminating the lease after the plaintiff was unable to obtain required levels of liability insurance. Because, however, the lease’s force majeure provision did not specifically refer to the plaintiff’s inability to procure or maintain insurance as a triggering event, the New York Court of Appeals held that the provision was inapplicable.

As to the second general principle, a Michigan appellate court held that for a force majeure provision to apply, performance under the contract must be impossible, and not merely financially impracticable. Kyocera Corp. v. Hemlock Semiconductor, LLC, 313 Mich. App. 437, 886 N.W.2d 445 (2015).

In the Kyocera case, a solar panel manufacturer sought to rely on a force majeure provision in a contract based on an action taken by the government of China that purportedly forced the plaintiff to pay significantly higher prices for solar panel components. The court rejected the plaintiff’s force majeure argument, finding that the Chinese government’s alleged conduct had not prevented the plaintiff from satisfying its contractual obligations but had merely caused the contract to be less profitable.

Similarly, in Sherwin Alumina L.P. v. AluChem, Inc., 512 F. Supp. 2d 957 (W.D. Tex. 2007), the plaintiff sought to invoke the force majeure provision in its supply contract on the basis that new government regulations required the plaintiff to purchase new and expensive equipment to satisfy its contractual obligations.

Applying Texas law, the Sherwin Alumina court rejected this argument, finding that the plaintiff’s need to upgrade its equipment did not render the contract impossible to perform. The fact that the costs of contractual performance turned out to be higher than the plaintiff had anticipated did not mean that the new regulations had given rise to a force majeure event.

Force Majeure Clauses In The COVID-19 Environment

With these principles in mind, a party that seeks to be excused from performing its contractual obligations based on conditions caused by the coronavirus pandemic should closely review the language of the contract and its applicability to the circumstances that have made performance of those obligations problematic.

In some contracts, force majeure provisions refer specifically to “epidemics” or “pandemics” as covered occurrences. Where a contract identifies those particular conditions as force majeure events, a party might well be able to invoke that provision in the current environment, particularly given the World Health Organization’s official characterization of the COVID-19 outbreak as a pandemic.

If neither epidemics nor pandemics are referenced in a contract, a force majeure clause might still apply if it refers to events directly caused by the COVID-19 pandemic, such as labor and supply shortages or governmental lockdowns, or where it broadly defines a force majeure event as any occurrence beyond a party’s control and not attributable to the other party.

Ultimately, whether the coronavirus outbreak qualifies as a force majeure event depends on the contractual language at issue, the relationship between the outbreak and a party’s nonperformance under the contract, and whether performance of the party’s contractual obligations would be literally or effectively impossible, as opposed to merely unexpectedly difficult or costly.

Notice Requirements

Many contracts require that a party provide specific notice to the other party of its intention to invoke a force majeure provision. Some contracts require such notice within a certain timeframe following the occurrence of a force majeure event, whereas others simply require “prompt” or “reasonably prompt” notice.

With regard to the coronavirus outbreak, an important consideration in construing any notice provision will be exactly when the force majeure event occurred. Depending on the language of the contract and the specific circumstances at issue, that could be when the World Health Organization declared the COVID-19 outbreak a pandemic, or when governments imposed travel bans and shuttered “non-essential” businesses.

Conclusions

In light of the profound economic disruptions caused by the coronavirus pandemic, contracting parties would be wise to seek to negotiate broad force majeure provisions in future contracts. While it is impossible to predict what the next global crisis may be, and when it might arise, businesses that are able to include expansive force majeure provisions in their contracts will be best protected against similar eventualities.

* * *

A previous version of this article appeared in New England In-House (NEIH). The Firm is grateful to NEIH for its support.