Coronavirus and Your Commercial Contracts – Force Majeure Clauses
You may have noticed that your commercial contracts contain miscellaneous “boilerplate” provisions at the end of those agreements. There are good reasons to include those provisions, but businesspeople may think that those provisions are commercially unimportant – just additional language that the lawyers threw in at the end of the contracts. However, when unexpected events occur during the commercial relationship, those boilerplate provisions become critical. For example, take the current COVID-19 crisis, which is forcing people to practice social distancing and is impacting manufacturing, transportation and supply chains. This disaster certainly was not caused by you or by the counterparties to your contract. Nevertheless, you or your counterparty (or both) may be unable to perform under those contracts because of this event.
Enter the force majeure clause…
What is a Force Majeure Clause?
This clause, if it exists in your contracts, may provide for the suspension or discharge of a party’s duty to perform if unforeseeable events occur that make it impossible or impracticable for one party to fulfill those contracts (e.g., an “act of God”). This provision typically requires the event at issue to be unforeseeable to all parties to the contract.
The language of each contract will govern whether a particular event qualifies as a force majeure. Many force majeure clauses spell out specifically the types of events that would trigger any right to suspend or discharge a party’s duty, while other clauses are drafted more generally. Thus, some contracts may specify that global pandemics qualify as force majeure events, or they might provide that force majeure may be triggered by issues such as government-imposed shut-downs, a declaration of a state of emergency or the inability to obtain labor or materials. Again, the specific language of the contract is key to the analysis.
The contract may also detail the level of interference a party must experience prior to invoking the force majeure clause. For example, some contracts may provide that the event must continue for a certain period. Alternatively, the event might need to have prevented, hindered, or delayed performance. Depending on how the clause is drafted, a party might not be able to successfully claim that a force majeure event occurred, even when it was not objectively impossible for the party to perform.
What Should Businesses Do If They Cannot Perform Under a Contract?
Businesses that now find it impossible or impracticable to continue performing under any contract should review the relevant contract to determine whether it contains a force majeure clause. If the contract does include such a clause, the specific language should be carefully reviewed to determine whether it covers an event like COVID-19.
Even if COVID-19 falls within the language of the force majeure clause of a particular contract, the event must also objectively affect the party’s ability to perform under the contract. Accordingly, a business that wishes to invoke a force majeure clause must demonstrate that COVID-19 caused it to be impossible or impracticable for the invoking party perform the contract, despite its own diligence and good faith. This means that you still need to consider whether there are alternative means for your business to perform its contractual obligations, and whether those alternative means are practicable. You should also analyze the potential consequences (including monetary damages and loss of reputation) if it turns out that you improperly invoked the force majeure clause.
In addition, before deciding to invoke a force majeure clause, your business should consider the effect of such a declaration on other agreements or legal obligations. For example, many loan agreements require the borrower to make representations to the lender regarding (or covenants to provide notice of) events that could lead to a material litigation or anticipated loss outside the ordinary course of business. An interruption in your business also may constitute an event of default under your other contracts.
If, after undertaking the analysis summarized above, your business decides to invoke the force majeure clause, you should make sure that it complies with the contractual requirements to provide notice to the other party. The form, timing and delivery of the notice to the other party must strictly comply with the contract’s requirements; otherwise the force majeure defense could be deemed waived.
Once your business provides the required notice(s) to the contract counterparty, you should be prepared to manage communications with that counterparty. You might wish to continue working with your counterparty once the virus abates, so maintaining a good business relationship could be very important.
What If My Contract Has No Force Majeure Clause?
If a contract does not contain a force majeure clause, the law in many states provides that a party may be excused from its obligations to perform under a contract, if performance becomes impossible or impracticable. The doctrine of impracticability may provide relief where superseding events occur, the non-occurrence of which was a basic assumption on which the contract was made and it would be unreasonable to require performance in light of such events. The doctrine of impossibility may excuse non-performance when performance was rendered objectively impossible for any similarly-situated party. The definitions of “impossible” and “impracticable” in any particular case, however, will depend on the prevailing case law of the jurisdiction that governs the contract at issue.
In New York, courts apply the doctrine of impossibility narrowly, such that it generally only applies to contracts where the event at issue was unforeseeable and destroyed either the contract’s subject matter or the means of performance. Despite the general narrowness of the scope of the impossibility defense in New York however, one could argue that performance is impossible or impracticable in light of the current Coronavirus epidemic given the “states of emergency” that have been declared so far, as well as the new city and state directives that have been issued to promote public health.
Separately, the concept of “frustration of purpose” excuses non-performance in certain situations where the objectives of the contract have been completely defeated by circumstances that arose after the contract was executed. Courts in New York tend to apply this doctrine only in cases where it makes little sense for the parties to continue performing under a contract because of an intervening event.
What If My Counterparty Invoked the Force Majeure Clause Against My Business?
It should also be noted that these considerations also apply if your business receives a notice that your counterparty is invoking a force majeure clause. If your counterparty invokes a force majeure clause against you, then you should analyze the language of the clause as well as the counterparty’s practical ability to perform under the contract. You may be able to convince the counterparty (or a judge or jury) that no force majeure event actually occurred.
The question of whether your business can successfully invoke a force majeure clause (or whether your counterparty can successfully invoke the clause against you) must be determined on a case-by-case basis. The issues above must be carefully analyzed.
During these uncertain times, Tannenbaum Helpern attorneys are available to assist you in (1) analyzing your rights to rely upon or challenge force majeure defenses and (2) help you figure out the best strategy to negotiate the best outcome with your counterparties. Should you have further questions regarding the topic discussed, please contact Michael Riela at firstname.lastname@example.org, Paul Sarkozi at email@example.com, or Vincent Syracuse at firstname.lastname@example.org.
 In Bush v. Protravel International, Inc., 192 Misc.2d 743 (2002), the court examined whether a party could be excused for failing to cancel a travel contract in accordance with its terms immediately following the September 11, 2011 attacks. The court noted: “New York City was in the state of virtual lockdown with travel either forbidden altogether or severely restricted” and “was on a wartime footing, dealing with wartime conditions.” Id. at 746. The court held that measures implemented by state and city governments (including their declaration of a state of emergency in the wake of 9/11/2001) supported the claim that performance of the contract had been rendered impossible for a period of time.
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E-Alert is a quarterly newsletter that features the latest thinking from Tannenbaum Helpern's various departments.
03.23.2020 | PUBLICATION: E-Alert | TOPICS: Bankruptcy, Corporate, Litigation