Now that you’ve got you, your family and your staff safe, you’re probably worrying about the effect that this is going to have on your business and its ability to conduct business.
As you know, the pandemic continues to disrupt the global economy and to disrupt production, staffing, supply chains and travel. Businesses need to understand and consider the potential legal risks and how to protect themselves against them and potentially use them to their advantage. Specifically, if there is a force majeure clause in your contract, how does it help you? How does it hurt you?
A force majeure clause refers to an “exit clause” in a contract which is triggered, generally, as a result of unforeseeable circumstances, beyond anyone’s control, that makes it materially impossible for a company or person to fulfil an obligation. These extraordinary events, which commonly include war, riots, earthquakes, hurricanes, lightning, and explosions, energy blackouts, unexpected legislation, lockouts, slowdowns, and strikes, either excuse a party’s performance under a contract or limit the other party’s available damages. The parties’ rights are determined by the precise language written in the contract.
The daunting impact for businesses during this coronavirus chaos is making attorneys re-read the “force majeure” provisions in contracts, which sometimes may not be clear or even list a pandemic as an excusable event. While your contract may not specifically reference epidemics or pandemics, (a) such clauses often extend to decisions of the federal, state and local governments acting in their sovereign capacities which would be triggered here; and (b) we believe that the current situation will likely “read into” most force majeure clauses even if not expressly set forth (unless of course pandemic was specifically negotiated out). “The doctrine of force majeure is based on the common law doctrine of impossibility of performance. Under the common law, impossibility of performance is “applied narrowly, due in part to judicial recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances.” [citation omitted] “Impossibility excuses a party’s performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against the contract.” [citation omitted] We believe the coronavirus pandemic will be widely accepted, except in the rarest of circumstances, to be accepted as creating an “impossibility.”
You may be wondering what you can do to prepare? First, review all of your contractual agreements. If a force majeureclause is viable, consider the implications of invoking it. If possible, consider alternative methods for fulfilling the contractual obligations. Keep a record and detailed proof of the disruption. Before entering into any new contracts, consider the impact of the coronavirus and future situations. Check to see whether insurance coverage is in place. Lastly, be mindful of acting in good faith and adhering to a code of “good faith and fair dealing” (reasonable commercial standards of fair dealing) – particularly in times of exceptional circumstances such as those in which the world currently finds itself.
The impact of invoking force majeure and considerations:
- Suspension of contractual obligations
- Non-liability
- Extensions in regard to fulfilling contractual obligations
- Renegotiation of terms and conditions
- Obligation to mitigate losses
- Contract termination
With the worldwide spread of the coronavirus, and the continuing expansion of quarantines and travel limitations for businesses, it is important to examine those contracts at risk for disruption or non-performance. If the contract contains a force majeure provision, a careful analysis of the clause is in order.
The McHattie Law Firm continues to follow COVID-19 developments as they impact the workplace and will provide frequent updates on those developments. For assistance addressing issues in your workplace, feel free to contact us.
This blog is for informational purposes only. It does not constitute legal advice and may not be relied upon as such. If you face a legal issue, you should consult a qualified attorney for independent legal advice with regard to your particular set of facts. This blog may constitute attorney advertising. This blog is not intended to communicate with anyone in a state or other jurisdiction where such a blog may fail to comply with all laws and ethical rules of that state of jurisdiction.