Additional Guidance on Force Majeure as COVID-19 Restrictions Ease

July 02, 2020

Does the force majeure clause in your contract still apply as governments and businesses start to reopen? As many U.S. states ease COVID-19 related restrictions, organizations continue to identify significant hurdles to their ability to perform under various contracts. Obligations that may have seemed achievable when the COVID-19 pandemic originally broke have since been rendered much more difficult to accomplish. Despite some progress in reopening, contracting parties are assessing their options and being forced to make difficult determinations about whether they can meet their duties. Others are required to decide whether to hold firm on a counterparty’s commitments or to offer some relief.

Force Majeure Considerations

Force Majeure provisions dictate the parties’ obligations in the face of unforeseen events that prevent performance. If the hindrance is severe enough, a force majeure clause may permit a party to terminate the contract altogether without liability. While force majeure clauses are often viewed as “boilerplate” and therefore receive less attention than an agreement’s substantive deal terms at the negotiation stage, they have by necessity become an integral backdrop to parties’ negotiation of COVID-19-related issues.

Force majeure clauses vary widely, with most including a list of example events that would constitute a “force majeure” and therefore justify a party’s nonperformance. The types of events listed vary widely too, often covering natural disasters, governmental actions, labor strikes and acts of war or terrorism. Some clauses include pandemics, epidemics or diseases on the list, which would certainly serve a nonperforming party well under the current circumstances.

When assessing the types of events that constitute a force majeure, it is important to consider all of the implications of the current pandemic. For example, even if pandemics, epidemics or disease are not listed as force majeure events, continued state-mandated restrictions on gathering could qualify as a governmental action that makes it impossible or illegal to perform. Similarly, most provisions make the lists of force majeure events non-exclusive, meaning that a party that cannot perform could still argue that the force majeure clause should apply even if COVID-19 does not fall within one of the specifically listed event categories.

If a Contract Does Not Include a Force Majeure Clause

The parties may also rely on a lesser-used legal principle – frustration of purpose – to modify or terminate a contract. A party claiming frustration of purpose must demonstrate that the nonoccurrence of the unforeseen event was a basic assumption on which the party relied in entering the contract. As a result of the occurrence of that event, the party’s basic purpose for entering into the agreement must be substantially frustrated. For example, if an organization planned to hold a 300 person fundraising event in August 2020, that organization could try to terminate its event venue contract now relying on an argument that COVID-19 has frustrated the purpose of the event. Event planners often have a critical mass of attendees committed months beforehand, which is not likely for an in-person event this August, even if the fundraiser could technically proceed by then. Further, an attempt to proceed with the event could have negative public relations implications, which would run counter the purpose of such gatherings.

Reopening Considerations

While each state is taking a different approach, many U.S. states are now in some stage of emerging from pandemic-induced closures and other restrictions. This inherently raises the question of what obligations the parties will have when restrictions are eased or rescinded altogether.

As an initial matter, parties should take stock of how the COVID-19 pandemic affected their contracts both with respect to their own performance and that of their counterparties. Hopefully, if someone had difficulty performing, the parties discussed them real-time to alleviate the stress points. If there are nonperformance issues that have yet to be addressed, the parties could consider a less formal debrief among the various business owners with direct knowledge of the issue or, if necessary, a mediation. Doing so proactively could result in less dispute later on.

For those parties who were unable to perform on contracts with third-party partners with whom they have longstanding relationships, they should consider attempting to find some common ground to lessen the impact of that nonperformance. Returning to the fundraising event example, numerous event planners have been forced to cancel events due to COVID-19 restrictions. Under such circumstances, some event planners have decided to delay the event or schedule the same event for next year at the same venue in order to show a commitment to a preferred venue operator.

Parties should also consider how the reopening process will affect their contractual relationships. A mild return to normalcy will likely not, in and of itself, mean that parties can immediately revert back to their previous performance positions.

Key Takeaways

  • Parties should take stock of how the COVID-19 pandemic affected their contracts both with respect to their own performance and that of their counterparties.
  • In analyzing the specific circumstances, both parties should consider what steps the defaulting party took to mitigate, and whether the contract can be partially performed or delayed.
  • While claims of impossibility or frustration of purpose can offer some relief, the presence of a force majeure clause still provides a stronger initial bargaining position to a nonperforming party. A force majeure provision demonstrates that both parties contemplated that unforeseen circumstances could arise and how they would address them once they did.
  • Contracting parties should maintain an open dialogue as systems, processes and distribution channels come back online to work through any residual shortfalls or delays.

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