COVID-19: "Act of God"/Force Majeure in Contracts
Invaluable protection in perilous times
by Thomas D. Herman, Esq.
As the coronavirus – or COVID-19 - pandemic disrupts everyone’s life, many companies are asking how it may affect their contractual obligations, and in particular, whether their contracts permit them or their counterparties to declare force majeure (French for “superior force”) to excuse their contractual obligations.
While economic considerations are certainly secondary to the protection of human life today, no one is ignoring them.
What should you do if you are unable to fulfill your contractual obligations due to events related to the coronavirus? How do you respond if a counterparty seeks to invoke force majeure against you?
What is a force majeure clause?
A force majeure clause – sometimes referred to as an “Act of God” clause - is a contractual provision that excuses a party’s performance obligations due to circumstances that are unforeseen and beyond the party’s control.
In order to invoke a force majeure clause, there must be a causal link between the force majeure event and the party’s inability to perform. In some cases, even in the event of force majeure, a party may be required to show that it made a reasonable effort to mitigate its effects.
Force Majeure clauses are typically buried in the back of an agreement and often regarded by many businesspeople and even some lawyers as mere boilerplate, not given much thought. This would be a mistake. A force majeure clause, if drafted correctly, can be a lifesaver. If drafted incorrectly, however, it provides only the illusion of protection.
Not all force majeure clauses are the same. Subtle differences can have significant repercussions. The definition of what constitutes force majeure, and thus what circumstances may excuse a party from performing, can vary significantly. Some force majeure clauses specify which events constitute force majeure and exclude anything not specified; others use general language along the lines of events “beyond a party’s control”. The devil – or the angel – is in the details.
For example, some clauses allow a party to terminate the contract altogether in certain circumstances; others merely allow for a delay to give the affected party additional time to perform. Notably, many expressly exclude payment obligations from those that may be excused.
Don’t ignore the interplay with dispute resolution and choice of law provisions.
Invocation of force majeure can have tricky, even unexpected, results with potentially huge economic consequences, requiring the wisdom of Solomon – or at least a good dispute resolution provision - to untangle.
Consider the circumstance of the “sole source” supply agreement, requiring a buyer to purchase covered items only from a particular supplier. That commitment is naturally contingent upon the supplier being able to satisfy the buyer’s requirements. If a force majeure event occurs that prevents the supplier from satisfying the buyer’s requirements, should the buyer be permitted to purchase the item from a different supplier? And what happens if a party impacted by a force majeure event is unable to perform its obligations altogether, even if given additional time? Should it have the right to terminate the agreement? What if there is disagreement as to whether a force majeure event has occurred at all?
Finally, the choice of law provision in each contract may be determinative as to the meaning of force majeure. In most U.S. states, force majeure is not implied in contracts – it must be specifically included to excuse performance.
Some states, New York for example, narrowly construe the force majeure clause. It must contemplate the specific event that prevents performance, and no mention of an epidemic probably results in no relief from the obligation.
What should you do now?
Review your existing contracts. Do they have a force majeure clause? If so, do they contain language, including specific examples, which reasonably construed cover coronavirus in the definition?
If the force majeure provision has a formal notice requirement, be certain to comply with that.
Depending on the specific force majeure language, you may wish to discuss with your counterparties the potential invocation of force majeure and how best to mitigate the impact of the pandemic on each party’s obligations. Even if your agreement doesn’t have a force majeure provision, these discussions can be helpful, particularly where the events brought on by the pandemic – or other force majeure event - frustrate or make impractical the contract’s principal purpose.
If you have any questions or concerns regarding your contractual force majeure, choice of law, or dispute resolution provisions, don’t hesitate to contact Tom Herman at email@example.com or 617-228-4415, or any other member of the firm.
March 20, 2020
Disclaimer: © 2020 This information is not intended as legal advice. Readers should consult a qualified attorney before acting on any of the information contained in this document. This information is provided for informational purposes only and may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts.
Tom Herman maintains a broad corporate practice at Smith Duggan Buell & Rufo LLP. He often serves as outside general counsel to start-ups, young companies and emerging-growth businesses. He has considerable expertise at business formations, corporate financing, protecting intellectual property, drafting business contracts, and employment law. He also represents nonprofit entities in a range of business law matters. Tom began his career as a litigator with WilmerHale and provides attractive, cost-effective alternatives to legal services available at much larger law firms. He is a partner with Smith Duggan Buell & Rufo LLP in Boston.