The rapid outbreak of the novel coronavirus (COVID-19) and its effects are changing the commercial landscape on an almost daily basis. But there are steps a party can take now to mitigate the effects on its business.
As the coronavirus spreads, supply chains, manufacturing and business operations, and commercial travel across the globe have been disrupted. On March 11, the World Health Organization characterized COVID-19 as a pandemic. President Donald Trump declared the outbreak a national emergency, and several state and local officials have also declared emergencies. The Centers for Disease Control and Prevention has confirmed thousands of cases of the novel coronavirus in the U.S.
During this time, we are counseling clients on numerous legal concerns related to the virus, including those clients contemplating declaring a force majeure event and those receiving notices of a force majeure event.
What is Force Majeure?
A force majeure provision may delay or excuse a party’s nonperformance where such nonperformance is attributable to circumstances beyond the party’s control that make performance too difficult or impossible. Whether an event triggers a force majeure clause is a fact-specific analysis. The parties should carefully examine the contract and other related agreements to determine all rights and obligations, including identifying any force majeure clauses. Depending on the express terms of the contract, the parties may also need to determine if the circumstances are unforeseeable or able to be mitigated and if performance is impossible. The party relying on the force majeure provision to excuse nonperformance must demonstrate that the event rendered performance objectively impossible and not merely more expensive or burdensome. Also, we would not typically expect payment obligations under contracts to be excused by a force majeure event.
Force majeure provisions vary greatly in commercial contracts. In most states, the plain language of the contract will govern. Some provisions are broadly drafted and include language that any event that is not reasonably foreseeable can trigger a force majeure clause. Other provisions are narrowly drafted, and only those events specifically listed constitute a force majeure event. Typically, force majeure provisions list specific events such as acts of God, war, strikes, terrorist attacks, epidemics and government actions that excuse performance. COVID-19 may be a force majeure event, but as noted above, the analysis is factual. Does the contract have a force majeure provision? If so, does it specifically list a pandemic? Does it specifically list a governmental act? Is performance truly impossible? Can the party mitigate the circumstances?
If a contract does not contain a force majeure clause, the parties may look to the governing law and the courts for recourse. While courts may reject a force majeure claim if the underlying contract does not contain a force majeure clause, some common law doctrines may excuse nonperformance in cases where performance is impossible or impractical. In Louisiana, a party may be excused from performing where performance is impossible due to fortuitous events. (See La. Civil Code Articles 1873-1878.) Further, not all courts interpret “acts of God” the same way, and courts may disagree on the extent to which a series of events (which may be both natural and political) should be treated as a combined force majeure event.
The contract may also require one or both parties to mitigate the effects of the force majeure event. A court may require an impacted party to have engaged in mitigation or attempted other efforts to fulfill its contractual obligations before excusing performance under the force majeure clause.
Communication and Timely Notice
Many force majeure provisions require that a party claiming force majeure provide notice to the other party within a specific time frame or within a reasonable time from the event. It is important that a party declaring a force majeure event provide notice within the time specified. If such notice is not required, it is a good idea to communicate with vendors and customers to keep them apprised of any delays affecting your supply chain or restrictions in your business operations. Effective and frequent communication with all parties is critical, keeping in mind that the relationship of the parties often has a significant influence on a successful resolution.
Considerations Going Forward
Businesses should not wait to start thinking about how the coronavirus will impact their future. A party should identify and examine the force majeure provisions in its contract and other material agreements. The party declaring a force majeure event should identify and comply with any notice requirements under the agreement. Finally, the parties should be proactive in mitigating delays or disruptions, if possible, including by anticipating potential effects of the pandemic on its commercial operations.
Please contact Jonathan Benda or Madison DeWitt if you have any questions regarding these considerations.