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Force Majeure Provisions and COVID-19

Force majeure clauses are inserted into contracts to account for extraordinary circumstances under which neither party can be held responsible for non-performance. Such provisions have been common to the point of being neglected boilerplate. Now, however, the pandemic has imposed extraordinary hardship on nearly every facet of society. Businesses and public entities of every sort must therefore be keenly aware of what their contracts say—and do not say—so that the coming months can be managed effectively. Below is a brief guide on this area of law that is sure to see significant development in the coming months and years.

A force majeure clause excuses a party’s performance under a contract under extraordinary circumstances. Those circumstances are spelled out in the clause, and typically include natural disasters, acts of war, and labor disputes. That provision may contemplate health crises or pandemics and may also have a general catch-all provision. As with any contract, courts look to the plain terms of the provision in applying a force majeure clause to excuse performance. Accordingly, there must be such a clause present in the first instance; it will be clearly labeled as such, or else will be unmistakable by its terms. Factors typically considered then include the degree to which the triggering event was foreseeable, steps taken to mitigate its effects, causation as to the impossibility of performance, and notice that the clause is being invoked. Note also that the clause itself may exhaustively set forth procedures for its application, though they tend not to be of a substantially different character than the foregoing.

In the absence of a force majeure clause, other defenses or contractual provisions may apply to achieve the same effect for a party that cannot perform and wants to be relieved of its obligation to perform. A few such related concepts are impossibility, frustration of purpose, and excusable delay. These concepts either excuse performance or afford additional time for performance in the event of extraordinary unanticipated circumstances that render performance impossible or else make it pointless to continue to perform.

Despite the rarity of a global pandemic like we now face, there are plain lessons to be learned from past cases as well disputes already bubbling up. First, communication is key. That is, if a party to an agreement believes that it cannot perform or realizes that it will not be able to perform in the future, then it is prudent (if not imperative) that the party refer to the express terms of the contract and ensure that it complies with any notice provisions therein. Whether or not the contract is silent on this point, a company should not needlessly risk forfeiting the protection of a force majeure clause by failing to timely apprise its business counterparts of a critical situation. Given the wide geographic and temporal reach of the current pandemic, it is especially important to mitigate risk and work to resolve disputes before they boil over.

It is likewise important to appreciate the fluidity of the situation. Governors have already issued, revised, and re-issued executive orders affecting wide swaths of the population. Reaching a thorough understanding of one’s rights and obligations in the moment should not work to the detriment of keeping up on developments that may entirely change one’s initial calculus. As with any dispute, or even the prospect thereof, litigation should not be taken lightly. What may appear now to be clarity in contracts and case law may not be so clear after courts are called upon to consider force majeure and related defenses at a much greater rate.

Melick & Porter continues to monitor the impact of the pandemic, and remains available to guide you through this challenging time.

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