14 March 2020

Assessing Force Majeure Clauses in Response to COVID-19

***Information and guidance in client updates was up to date at time of publication. During the pandemic, information and guidance has been changing rapidly. If you have any questions about the information contained in a client update, please contact the author(s) or your Miller Johnson attorney.***

In the midst of the global COVID-19 pandemic, it is not surprising that more and more businesses are dusting off their contracts to determine what, if any, ability they have to excuse perform or other otherwise renegotiate key business terms, based on the virus’s impact on supply chain, labor force, manufacturing capabilities and logistical operations.  This post focuses on the application of “force majeure” provisions in contracts and provides a few key takeaways, in analyzing their applicability in the current COVID-19 environment.

A force majeure clause in a contract is designed to excuse performance of the parties’ contractual obligations in certain situations, which make performance illegal, impossible, or in some cases commercially impracticable.  Enforceability of such clauses first turns on whether the clause identifies the type of event for which the claiming party cites as the basis for its nonperformance. Standard force majeure clauses include” acts of God,” natural disasters, fire, war, civil disorder, etc.  Others include disease, medical epidemics or outbreak, or labor strikes.

Because force majeure clauses are interpreted narrowly, for an event to qualify as “force majeure” it must be referenced in the clause at issue. As such when reviewing such clauses in key contracts, one must first determine if a pandemic such as COVID-19 falls within in its scope so as to excuse performance under the contract.

Even when a potential force majeure event is specifically included in the clause, contracting parties are under an obligation to mitigate any foreseeable risk of nonperformance, and cannot invoke force majeure where the potential nonperformance was foreseeable and could have been prevented or otherwise mitigated. Additionally, in most jurisdictions, force majeure will not excuse performance if it is merely financially or economically more difficult to satisfy contractual obligations. In fact, most courts require the force majeure event to render performance impossible, unless the force majeure clause expressly contains a lesser standard such as commercial impracticability.

As a result, taking affirmative steps to mitigate the potential risk associated with a force majeure event is especially important.   Given the ability to now foresee the growing impact that COVID-19 presents to the economy generally, companies should actively attempt to mitigate any potential operational impacts in advance of the virus spreading to new localities throughout the U.S and abroad, that may place additional strain on manufacturing capabilities, supply chain, labor force, or transportation capabilities. Ideally, these steps will avert any disruptions in operations as the virus continues to spread.

Even if such steps are not successful in avoiding the need to rely on a force majeure clause, taking steps to mitigate risk will impact a court’s determination of whether reasonable steps were taken to continue to satisfy contractual obligations, and whether performance was truly impossible.

Force majeure clauses, like most contractual clauses, are subject to interpretation and may be interpreted differently depending on applicable law.  The Miller Johnson team is here to assist you in assessing your various contract rights, including the applicability and enforceability of force majeure clauses, as you continue your risk avoidance and mitigation efforts, related to COVID-19.