April 27, 2020 Managing Contracts and Force Majeure During a Pandemic

Companies must understand the principles of force majeure in light of contract performance issues during the coronavirus pandemic.

By Rachel Nudel, Esq., Lindabury, McCormick, Estabrook & Cooper, P.C.

Along with grave economic upheaval, the COVID-19 pandemic has brought an influx of contract concerns for industries across the board. Many industries are facing the inability or extreme difficulty in fulfilling their contracts both during the crisis and in the uncertain aftermath. The overriding question: how do businesses continue to fulfill their contractual obligations when governments have ordered nonessential workers to stay home and goods that are relied upon have become suddenly unattainable with widespread disruptions in supply chains?

Businesses faced with these problems will seek to avoid contract performance without penalty, while those needing goods and/or services will be looking to induce contract performance. For both sides, understanding the contract principle of force majeure is essential for business survival.

Force majeure (“greater force” in French), refers to an unexpected event or extraordinary circumstance that may excuse or suspend performance of a contract. Historically such events have included war, strike, government order or Act of God (typically a natural disaster). The question of whether force majeure could apply in the wake of the COVID-19 pandemic requires careful analysis as outlined below.

If your business is facing difficulties fulfilling contracts, the first step is to determine if the contract at issue has a force majeure provision. If it does, the next step is to figure out if the force majeure provision specifically addresses outbreak or virus.

The application of force majeure provisions will depend on the specific language of the clause and the choice of law that applies under the contract. Some force majeure provisions may specifically exclude disease or pandemic, while others may provide for it.

Perhaps the most significant question is: would a court find that the coronavirus excused performance under the circumstances, in the event of litigation?

The answer to this question will inevitably have several different layers and will be extremely fact specific. Invocation of force majeure provisions will likely give rise to disputes regarding whether companies did enough to find alternative solutions. For example, a fact finder will likely consider whether a party did enough to find goods sourced from other parts of the world. This sort of analysis may be different for each industry and is likely to change with the passage of the pandemic. What was practicable yesterday, may no longer be practicable or even possible today or next week.

If the contract in question does not contain a force majeure clause you can look to the doctrines of impracticability or frustration of purpose. These apply to situations in which a party’s obligations under a contract can be excused or mitigated because of the occurrence of a supervening event not anticipated at the time the contract was created, which fundamentally alters the nature of the parties’ ongoing relationship. Frustration of purpose arises when performance can still be carried out, but the supervening event fundamentally has changed the nature of the parties’ overall bargain.

Without specific language pertaining to force majeure, a contract for the sale of goods is governed by the Uniform Commercial Code (“UCC”). The UCC provides for the basic assumption that if there is a world-altering event and contract performance has become impracticable, the performance of some terms or expectations of the original contract may be excused.

Along with the many pressures, uncertainties and fear of the COVID-19 pandemic, contractual matters can seem overwhelming. A sound approach is to follow these steps:

• Monitor the situation and understand the impact the pandemic has on your business’ ability to perform your obligations under a contract. Consider how the other party’s obligations may be affected.
• Be aware of any notice provisions, often required by force majeure clauses.
• Keep detailed records that include the scope of the interruption to your business and detail the factors leading to impossibility or impracticability.
• Consider practical solutions to legal issues. A compromise or mutual agreement to reschedule contract performance deadlines to a time after the crisis has subsided may be in everyone’s best interest. Although you may be able to successfully invoke a force majeure clause or other provision of your contract, consider the future impact of this on your long-term business relationship.
• Be aware that in an unprecedented move, the State and Federal courts have significantly decreased their operations for all but emergency applications and proceedings. While the courts are attempting to return to normal operations, this has not been a quick or uniform process. Therefore, depending on the jurisdiction, litigating many contract disputes will inevitably be delayed for an indeterminate amount of time.

Businesses are well advised to use this unprecedented crisis as an opportunity to give greater consideration to having force majeure clauses drafted or redrafted in all of their contracts.

A well drafted force majeure clause can be instrumental when businesses are faced with unforeseen circumstances such as those presented by COVID-19. If drafted poorly, on the other hand, force majeure language in a contract is only an illusion of protection and will not save a business from the many unforeseeable pitfalls during these uncertain times.

Rachel Nudel, Esq.

Rachel Nudel, Esq., a Partner at Lindabury, McCormick, Estabrook & Cooper, P.C., based in Westfield, NJ, (www.lindabury.com), concentrates her practice in the defense of individuals and corporations in general and professional liability matters, litigation and insurance coverage. She can be reached at rnudel@lindabury.com or 908.233.6800.

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