Force Majeure Clauses During CoVid-19
by Tara Vitale
April 3, 2020
in Articles, Business Transactions & Services, Flat Fees, Intellectual property, Social Enterprise & Nonprofit, Startup & Formation
Recently many businesses have been concerned with how to deal with CoVID-19. Concerns range from how to navigate complying with mandatory quarantines and other state and federal regulations, as well as how to deal with CoVid-19’s impact on standing contracts. While industries are impacted differently, some businesses are concerned about whether they will be required to fulfill their contracts or if there are special clauses that may allow their business out of a contract.
Force majeure clauses are a common contract clause that allow parties to a contract to suspend or terminate the performance of the contract in extreme situations. “Force majeure” is a contract clause that addresses outside forces that impact the performance of a contract. The force majeure clause will address issues that are out of the control of the parties, such as strikes, war, terrorism, or general events such as “Acts of God.”
If you are concerned about a contract, your first step should be to review your contract to see if you either have an express force majeure clause or something similar that addresses what happens to the contract when events outside of the parties’ control occur. Force majeure clauses are most likely located in the “miscellaneous” or “boiler plate” section of the contract. It may not be expressly labeled “force majeure” so look for language around extreme events and delays. Some contracts may not have the clause at all.
Next when reviewing your contract, be mindful of any notice provisions or timelines that the force majeure clause triggers. For example, if a force majeure event occurs, does one party need to give a certain number of days’ notice to the other party? Some force majeure clauses require a series of notices and delays that allow the contract to remain in place while giving the parties time to react to the outside event. If notices are required to continue the contract or to terminate the contract, you will want to begin the process as soon as possible so that you are able to minimize the time that you may be liable to perform or not perform under the contract. Even if no notices are required, it is still best practice to provide notice to the other party. Notice should include written communication detailing (1) the reason for providing notice and (2) reference to the contract clause you are relying on to terminate or delay the contract. These notices will help to document the facts and to keep the parties’ relationship intact.
Below are 2 examples of different force majeure clauses. Example 1 specifically lists out events that could cause delay, has a provision that provides for the parties to mutually revise the agreement, has a 30-day event continuance requirement, and only the disadvantaged party can terminate the agreement. Example 2 specifically lists out events, has a 3-day notice requirement from when the affected party is aware of the event, has a 90-day event continuance, and either party can terminate the contract.
As you read through there are key differences between the 2 examples. First, each example lists different types of events. While Example 1 focuses more on natural disasters, Example 2 includes more man-made events (public disorder, sabotage). Neither lists pandemic or public health events. Second, the waiting periods of both examples are vastly different. Example 1 is 30 days and would encompass CoVID-19 events in Seattle, but Example 2 is 90 days and as of the date of this article would not encompass CoVID-19 events. Third, the notice provisions are timed at opposite ends of the event. Example 1 requires 5 days’ notice after the waiting period, while Example 2 requires 3 days’ notice before the waiting period and is triggered by the start of the event. Fourth, the party that can terminate the agreement is different. Example 1 allows only the disadvantaged party to cancel. Example 2 allows for either party to cancel.
Neither provision is better, each provides pros and cons for each party. These examples highlight the importance of not assuming all force majeure clauses are the same and making sure to review each contract’s specific provision.
Example 1: Force Majeure. In the event of a delay caused by inclement weather, fire, flood, act of God, terrorist act, earthquake or any other cause beyond the control of the Parties, the Party or Parties so affected shall be excused from performance hereunder for the period of time attributable to such delay, provided that such affected Party uses reasonable efforts to overcome such delay. In the event of any such delay, the Parties may revise this Agreement by changing the performance period and other provisions, as appropriate by mutual written agreement, or if an event of force majeure continues for 30 days, the disadvantaged Party may terminate this Agreement upon 5 business days’ notice unless the event is resolved within such notice period.
Example 2: Force Majeure. Neither party shall be liable for delays or non-performance of its obligations herein due to causes beyond their reasonable control. This includes but is not limited to: acts of God, public disorder, sabotage, natural calamities, or any such phenomena. If any such delay or failure happens, the affected party shall send written notice of such delay or other circumstance within 3 working days from the time of the known occurrence to the affected party. In the event that the delay or non-performance of either party hereto continues for a period of 90 days due to reasons of force majeure, or if the same reason of force majeure cumulatively exceeds a period of 90 days, then either party shall have the right to terminate this Agreement with immediate effect without liability.
Lastly, you should review the governing law clause of your contract. The governing law clause should also be in the “miscellaneous” or “boiler plate” section of the contract. The governing law section is often overlooked, but it can have a big impact on the interpretation of the force majeure clause and your legal options as a business. For instance, the state of New York tends to interpret force majeure clauses very narrowly, meaning any outside event must be listed in the force majeure clause if it is to be relied upon. Up until this point, many businesses never imagined a world with mandated quarantines and regulated business shutdowns due to illnesses. Therefore, pandemics, quarantines, disease, illness or other CoVID-19 regulations (e.g. ordinances) are likely not listed in the force majeure clause. As you can see, finding out what law governs the contract will affect the interpretation of force majeure clause.
If you are in Washington, the court will look to the text of the agreement. In the case of force majeure clauses, Washington courts will deem that the clause includes coverage for any event that is specifically stated in the clause, as well as any event that would be considered within the scope of the events listed in the clause. So for instance, “floods” and anything that the parties can prove are within the scope of floods, will be grounds to enforce the force majeure clause. But what if the force majeure clause doesn’t specifically list a pandemic? In that case, you may need to rely on the more general terms included in the force majeure clause, such as “Act of God” or “events outside of parties control.”
As we are all discovering how to live and work in a CoVID-19 world, the use of force majeure clauses will increase and the Washington courts will be able to provide more guidance on force majeure clauses, specifically how the clauses will be construed during pandemics. If you or your business are concerned with the enforcement of standing contracts during this time, it is best to speak with an attorney to know your options and to speak with the other party to see if accommodations can be made. Remember, your business is not alone, and the other party may also be impacted by CoVID-19 and may be looking to amend the contract.
The above article is for general information purposes only and should not be relied upon as specific legal advice. This article, or using the email@example.com form, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact Tara M. Vitale at firstname.lastname@example.org.
July 14, 2020