Is Coronavirus a Force Majeure? Top Considerations for Business Contracts

The worldwide spread of the coronavirus requires companies and counsel to review third-party contracts at risk for disruption or non-performance due to the epidemic.  Many contracts may contain what is commonly known as a “force majeure” provision, which may excuse performance and liability. An example of a force majeure provision from a services contract is below:

"Neither Party shall be liable hereunder for any failure or delay in the performance of its obligations under this Agreement, except for the payment of money, if such failure or delay is on account of causes beyond its control, including labor disputes, civil commotion, war, fires, floods, inclement weather, governmental regulations or controls, casualty, government authority, strikes, or acts of God, in which event the non-performing Party shall be excused from its obligations for the period of the delay and for a reasonable time thereafter. Each Party shall use reasonable efforts to notify the other party of the occurrence of such an event within five (5) business days of its occurrence. If Contractor’s performance is delayed over [number] days, Client may terminate this Agreement."

This type of provision relieves parties from performing their contractual obligations when unforeseen circumstances arise which render performance inadvisable, commercially impracticable, illegal, or impossible. Force majeure is considered contract “boilerplate,” and is often buried alongside standard terms toward the end of an agreement, so many companies do not pay much attention to this clause until the company, or a third-party with whom they contracted, wants to get out of the contract.

When analyzing these clauses, it is important for companies to consider, at least on a preliminary basis, the questions below:

1. First, does the contract include a force majeure clause?
2. If the contract includes a force majeure clause, is the ongoing coronavirus pandemic, and/or the resulting regulations, closures, and/or city-wide lockdowns, included as one of the articulated reasons (i.e., “pandemic,” “epidemic,’  and/or “public health crisis”) underlying activation of the force majeure clause? Many contracts include a specific and “closed” list of events which are said to constitute force majeure  Some contracts may include “epidemic” as a listed example of a contractual force majeure event.  See, e.g., Wyndham Hotel Grp. Int’l v. Silver Entm’t, No. 15-CV-7996 (JPO), 2018 U.S. Dist. LEXIS 52144, at *27 (S.D.N.Y. March 28, 2018) (quoting force majeure clause that includes “epidemic” as an example of force majeure event); Aukema v. Chesapeake Appalachia, 904 F. Supp. 2d 199, 206 (N.D.N.Y. 2012) (same); City of New York v. R.A.M Used Auto Parts, 43 Misc. 3d 1205(A) (Sup. Ct. N.Y. Cty. 2014) (same).  In those cases, a party’s performance due to coronavirus may be excused because “the force majeure clause specifically includes the event that actually prevents a party’s performance.” Kel Kim, 70 N.Y.2d at 902.  However, this is not a hard and fast rule, as other force majeure contracts do not specify reasons such as epidemic, pandemic, or public health crisis.
3. If the contract does contain a force majeure clause and coronavirus would be included in one of the categories listed in the clause, what are the notice requirements, if any, associated with invoking force majeure?
4. If the contract does not include a force majeure clause, can the party who wishes to get out of the contract and/or relieve itself of its contractual (payment) obligations rely on the common law doctrine of impossibility or California’s Default Rule, which requires a high level of difficulty and extra expense associated with performance?
5. Irrespective of a force majeure clause analysis, is the company properly and adequately insured?  Does the company have, for example, business loss insurance? What about worker’s compensation insurance in case worker’s contract the virus while working?  This is a question that companies should pose to their insurance brokers and/or coverage lawyers.
6. Was potential nonperformance by either party to the contract foreseeable, and could it have been prevented or otherwise mitigated?  Considering the side of the party that wishes for “business as usual” performance, what proactive steps can the company take to ensure continuity of operations sufficient to meet existing contractual obligations, and evaluate whether the opposite party is also taking steps such that they will not have the need to invoke force majeure?  In light of the overwhelming press coverage on coronavirus and the effect on the economy, no company can say they did not know that they would be affected.  So, taking affirmative action to mitigate losses now is especially important to avoid any disruptions in their operations as the virus continues to spread.  A company’s attempt to mitigate its risk in advance will be highly relevant to a court’s analysis regarding whether reasonable steps were taken on the part of all parties to continue to satisfy contractual obligations, and whether performance was truly impossible.  Examples of mitigation include: 
   1. Securing alternate supply streams if products are in question; 
   2. Having employees work remotely to avoid liability for spread of coronavirus on the job; and
   3. Transferring certain operations/functions to other locations where the risks of quarantines and business closures are less.
7. Finally, can parties reach a mutual agreement to move the performance of the contract to a time after the crisis is over?  If both parties want full performance of the contract, can they negotiate a compromise where both parties’ needs can be met at a later date?  Also, are there alternative means to perform contractual obligations, such as adjusting or reducing each party’s scope of performance obligations (i.e. partial performance)?

In the coming months, we anticipate that many businesses will bring assertions of force majeure in response to quarantines, business closures, and travel restrictions. Whether companies can properly rely on force majeure as a means to get out of a contract depends on the language of the clause, the facts relevant to the particular contracts and businesses at issue, and mitigation efforts.

Smith Shapourian Mignano PC is available to answer any questions or concerns you may have regarding force majeure.

This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.