Force Majeure and the Coronavirus
Miller & Martin PLLC Alerts | March 10, 2020
UPDATE: As of March 11, 2020, the World Health Organization has declared the COVID-19 outbreak a pandemic.
The repercussions of the growing concerns over the global coronavirus outbreak are having a material impact on American business. Since the January 30, 2020 declaration by the World Health Organization that the coronavirus constitutes a global health emergency, concerns over the impact of the potential for the spread of the infection have predominated the news cycle. Many trade shows are being cancelled with no definite plans to reschedule as companies implement employee travel bans, both international and domestic, and otherwise work to mitigate the impact of the outbreak. These decisions impact sales cycles, production planning and cause localized financial impact on a wide variety of industries.
If you are starting to think about the potential implications of the coronavirus on your business and contracts, and the operation of a force majeure clause, consider the three steps detailed below.
First step: Look at your insurance options
The impact of the coronavirus, including the related disruption of the supply chain and the cancellation of events, raises material concerns over the ability and willingness of parties to satisfy contractual obligations created in advance of, and without thought to, the current outbreak. A common question facing most businesses is, what are we to do now? In some cases, business interruption insurance may provide a fallback for the economic impact that results from a company’s inability to conduct their business as planned. The terms of such policies should be closely scrutinized to ascertain the definition of triggering events.
Second step: Look at your contracts
Most commercial contracts also contain a “force majeure” clause that creates an exception to performance under the contract terms. What is force majeure? The answer is, “it depends.” Generally speaking, there is no generally accepted definition of force majeure. Some contracts will attempt to define force majeure; if so, that definition will be given primary effect. While it is unlikely that a contract entered into several months ago will specifically mention coronavirus, common definitions may include pandemics, epidemics or a broader reference to “disease.” In such cases, the triggering of such language will likely be dependent on the designation of a situation as an epidemic or pandemic by a recognized body such as the World Health Organization or Center for Disease Control. Further, the analysis will likely extend to how the declaration impacts the contract in question. A reference to a quarantine will similarly require a review of the level and area of quarantine as it relates to the performance terms of the contract and whether such restrictions are voluntary of mandatory.
Many of these clauses will include a reference to “Acts of God.” These are generally considered to encompass natural disasters (tornadoes, hurricanes, floods or weather events). The impact of a disease such as the coronavirus is currently unlikely to be categorized as an “Act of God” given the brunt of the impact currently being felt by the business community stems from intervening actions by governmental agencies and companies to impose restrictions on movement, rather than the direct effects of the disease itself. Some force majeure clauses may extend to reference actions taken by governments. In the present scenario, that would most likely translate to mandatory quarantines or travel restrictions that completely negate the movement of necessary goods or personnel. In evaluating the application of such a ban, alternatives will be examined to weigh the impact of such limitations. For example, as many companies begin to explore and rely on remote work and video meeting capabilities, these measures will be considered in determining whether performance was rendered impossible.
Third step: Look at the options available to you
Assuming your contract has a force majeure provision that comes into play, the next step is to see what type of relief it affords. A force majeure event may relieve complete or partial performance, or simply provide a basis to alter the timeline. The result will depend in large part on the wording of the contract. The clause may be broad enough to excuse performance at any level. Conversely, the language may provide a narrower range of options that allows/requires partial performance or impacts the timing of certain events contemplated under the agreement.
Notably, the occurrence of a force majeure event, by itself, may be of no consequence. The force majeure event must have a direct impact on the ability to obtain performance under the contract. For example, a travel ban in a foreign jurisdiction might be seen as a force majeure event, but if the ability to perform under the contract is not impacted by the event, no defense to performance will be available. A party seeking to claim force majeure as a defense to performance must be able to not only show that the event qualifies, but that it also impacted the specific duties in question.
Be mindful that the law generally favors those who make an attempt to perform their obligations when evaluating the propriety of a defense to performance. Generally, parties have a duty to mitigate harm. Affected parties should explore options to find alternate means to perform and document such efforts and seek an agreement from the other party as to alternatives or deviations and work towards a mutually beneficial strategy. Also be mindful of the fast pace of change in every situation. Circumstances are fluid and obligations must be constantly re-evaluated. Provide as much notice as possible to the other party as this will open the door to discussing a business solution and will also allow them the opportunity to attempt to mitigate any resulting harm.
Every situation is unique. If you have questions about these issues, consult experienced counsel who can help you to evaluate your options.