Five Key Takeaways From Our Contract Considerations Regarding Force Majeure in the COVID-19 Era Webinar
1. Force majeure is a contractual provision that excuses a party’s performance obligations due to certain events that are outside a party’s control. A force majeure provision must be included in the contract to be invoked; it is not a statutory or common law right. Whether the provision actually excuses performance will be determined on a case-by-case basis and will depend on the language in the contract, the law of the jurisdiction that governs the contract, and the specific facts of the case. The COVID-19 pandemic has created numerous impediments to contractual performance—such as supply chain issues, stay-at-home orders, travel restrictions, and the shutdown of non-essential businesses—causing many parties to review their current contracts or reconsider drafting proposed contracts in light of these difficulties.
2. The elements to be reviewed before invoking force majeure are the events listed in the provision and any “catch-all” phrases. As it relates to COVID-19, check to see if "acts of government" or "government orders or requirements" are included as events since they are most closely related to the reasons that parties have not been able to perform. Businesses should include "acts of government" or "government orders or requirements" to the lists of events in their contracts' force majeure provisions going forward. Although all courts take a narrow approach in interpreting force majeure provisions, states differ on how they interpret the elements of the clause. Courts in certain states will only excuse performance if the events are specifically enumerated in the provision whereas courts in other states will excuse performance if they believe that the "catch-all" phrase includes the event. Other common elements in the force majeure provision that should be examined in drafting the clause include "catch-all" phrases, whether the events listed are foreseeable, notice requirements, mitigation obligations, and termination or postponement of performance. Best practices include not treating the force majeure provision as boilerplate and reviewing the required elements in other jurisdictions, especially if the governing law does not provide enough information about the interpretation of force majeure clauses.
3. The force majeure provision is not the only defense that can be raised in response to the COVID-19 pandemic. Parties may also rely on statutory and common law doctrines. These alternatives include UCC § 2-615, which deals with excuse by failure of presupposed conditions in cases involving the sale of goods, and the common law doctrines of impossibility, frustration of purpose, and illegality. These doctrines may be helpful if the contract does not contain a force majeure provision or does not list any force majeure events that are applicable to the facts of the case.
4. An important part of any force majeure analysis includes the consideration of litigation and other practical issues. First and foremost, parties who are contemplating invoking force majeure should also consider any potential non-contractual commercial solutions (i.e., trying to work it out with the other party to the contract). Additionally, parties should consider the effect of invoking force majeure on obligations under other contracts and remain cognizant of post-invocation obligations, such as a potential duty to mitigate damages. Finally, parties should take special care to preserve relevant evidence and avoid creating harmful evidence so that they are in the best possible position should litigation become inevitable.
5. COVID-19 force majeure litigation has already started. Cases have been filed in California, Florida, Massachusetts, New York and Virginia and include issues such as collection of rent under commercial leases and trip cancellations. Undoubtedly, there will be more force majeure litigation resulting from COVID-19 in the months and years to come.