Everything is different now. Almost overnight, businesses around the globe were faced with unexpected challenges, such as sudden, major disruptions in supply chains and required closures. Businesses emerging from months of these closures face unprecedented challenges re-opening in a brand new, rapidly developing world.
COVID-19 stopped businesses worldwide from maintaining operations and meeting contractual obligations. No industry was immune to the effects. In addition to dealing with re-opening issues, businesses may encounter COVID-19-related litigation involving what is known as a force majeure clause in a commercial contract.
What is force majeure?
It is vital to a business’s survival that its operators understand the contractual rights and obligations of the parties and how a business can or should mitigate potential losses. The last couple of months have demonstrated the need to understand force majeure clauses found in many commercial contracts.
Force majeure clauses generally excuse or allow for the suspension of a party’s performance under a contract due to extraordinary events outside the party’s control that prevent the party from fulfilling its contractual obligations. These clauses are common in commercial contracts, and their provisions and definitions are often overlooked or ignored. But, when needed, they must be definitive, as they could very well serve to save a business or a relationship or prevent costly litigation.
Litigating force majeure clauses
Force majeure clauses are not easily invoked, and their application is generally specific to the contract between the parties. A court will determine whether a force majeure event has occurred according to the contract’s terms and what remedy is available. Courts will determine if the language of the force majeure clause speaks to the specific type of event blamed for the nonperformance.
Although certain exceptions to performance may be identified in the clause, they may remain non or ill-defined. For example, does the clause in question excuse performance due to government restrictions issued in response to a pandemic or disease? How is pandemic and/or disease defined? Does there need to be a certain impact to trigger the clause? Is the presence of a disease absent government response enough to allow nonperformance? Does the clause allow for nonperformance or only suspension of performance? Is there an obligation on either party to mitigate their damages? Does the force majeure provision provide for all products and facilities in the business’s supply chain, or is it more limited in scope?
Some courts narrowly address the issue, requiring the force majeure clause to identify the event or occurrence allegedly giving rise to the claimed nonperformance. It may very well be that some courts will allow “non-traditional” force majeure defenses due to the economic realities of the COVID-19 pandemic. Certain defenses, such as impossibility, may still provide a potential excuse for nonperformance for those clauses of a less-specific nature. Given the impact of COVID-19, courts allowing such defenses will likely produce varying interpretations of when performance is impossible and when it is only impracticable. Even then, however, parties will still likely need to address issues of foreseeability and mitigation.
The frustration of purpose may also provide an avenue of relief for a party that finds itself unable to perform and party to a contract with a less than straightforward force majeure clause. Analysis under the frustration of purpose doctrine focuses on whether the superseding event gave rise to a situation such that a party’s performance, even if completed, would not meet its original intent instead of causing impossibility of performance. Constantly changing and expanding governmental declarations and regulations may very well make it easier to invoke force majeure-type defenses not otherwise available under the contract, but diminished performance or increased expense will likely never excuse nonperformance under any analysis.
Parties will likely have some level of communication before nonperformance. Even if the term “force majeure” does not appear in the correspondence between the parties, communications discussing hardships related to the pandemic as a cause for nonperformance will likely re-appear somewhere in the initial filings. To that end, anything sent should be sent with an eye toward litigation and should be reviewed by legal counsel before sending. Plaintiffs will attempt to use such communications to establish a contributory link between the damage claimed and the alleged COVID-19-related disruption, and defendants will use such communications to refute Plaintiffs’ assertions by citing to government mandates and proclamations and the dates thereof, allegedly excusing nonperformance. Chronology may very well serve as the deciding factor in preventing or prevailing at force majeure litigation in a post-COVID-19 world.
Without question, litigation over force majeure clauses will become more prevalent in the coming months, and those disputes will be industry and occurrence specific. Litigants will need to be familiar with all local, state, and federal declarations and mandates affecting their business and how such declarations and mandates impact their businesses’ ability to function as contracted.
Any review of commercial contracts with the intent of determining the applicability and potential defenses to force majeure provisions should be undertaken with legal counsel. Analysis of the clause language cannot be undertaken in a vacuum and may very well include an analysis of how the force majeure clause interacts with the contract’s other clauses and requirements.
A damage analysis will likely include a review of the businesses’ insurance policies, specifically those businesses with business interruption and contingent business interruption insurance. Business interruption insurance may cover losses a business suffers as a direct result of an interruption to its operations. Contingent business interruption insurance, on the other hand, covers such expenses as lost profits resulting from interruptions to the business’s supply chain(s).
Being proactive during such unprecedented times is critical. Force majeure clauses should be reviewed and weighed against whether a business’s future performance is in question. Businesses may even find themselves simultaneously on both sides of litigation, that is, seeking to enforce a force majeure clause in one court while attempting to render one invalid in another. Litigation is always uncertain and made even more so during a pandemic. Proper legal guidance is necessary in this new world of ours.