Confronting the impossibility of performing under a contract: Using a force majeure provision in response to the coronavirus outbreak

Many businesses are feeling a strain on operations due to the recent global coronavirus outbreak (COVID-19). As the virus continues to spread, the long-term ramifications it will have for businesses are unclear. However, businesses that may be affected should consider what steps are necessary to mitigate their risks should any interruption in their businesses occur. One of the questions companies should ask is, “Does the coronavirus outbreak fall within the operation of a force majeure clause?”

What is a force majeure clause?

A force majeure clause governs what happens in the event of specified events or events beyond the control of either party after entering into a contract. Events that qualify as a force majeure typically depend on the language provided in the specific contract, but generally include events such as natural disasters, acts of God, strikes, war or other radical and extreme events that are not due to the fault of either party.

Courts will generally recognize events expressly listed and, when qualifying events are not expressly stipulated, will presume that force majeure events are limited to supervening events which arise without fault of either party and for which neither party intended to undertake responsibility. If implicated, a force majeure clause may provide for different solutions including complete discharge from the contract or extension of time for performance. In any case, a force majeure clause usually holds all parties to the contract safe from liability for non-performance or delay in performance.

Steps to invoke the force majeure provisions of a contract

Businesses should review their contracts to determine if force majeure provisions apply and if so, in what instances or events those clauses are triggered. On January 30, the China Council for the Promotion of International Trade (CCPIT) announced it would offer “force majeure certificates” and since then has issued thousands of force majeure certificates. Another indication that the coronavirus may prompt the applicability of a force majeure clause is the recent World Health Organization announcement declaring a global health emergency in response to the outbreak. Additionally, the United States declared a state of emergency due to the rapidly spreading virus and implemented new health screening requirements for U.S. citizens returning from China’s Hubei province.

There are several steps a business should take if it is looking to invoke the force majeure provisions of a contract:

  1. Carefully review the force majeure provisions to determine in what situations and for which events the provision applies and what the provision allows if implicated.
  2. Obtain as much information as possible regarding how the force majeure event has impacted the business – what areas of the business have been affected, how it will affect performance under the contract, how long is the delay in performance expected to last, and when is the force majeure event expected to conclude?
  3. Ensure there are no other alternative means for the company to perform its obligations under the contract or that the company has taken all possible steps to avoid implication of the force majeure provision.
  4. Review and confirm that all notice requirements under the contract have been satisfied, including time limitations on reporting.

Businesses seeking to invoke the force majeure provision should be aware that the other party’s rights, if the provision is invoked, may include the right to immediately terminate, terminate after a specified period of time, or source an alternate supplier. Businesses should consult with an attorney before sending a notice to ensure contractual compliance.

If you have questions about invoking the force majeure provision, please contact one of the McDonald Hopkins attorneys listed below.

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