The conditions created by the coronavirus (COVID-19) pandemic and resulting government shutdown orders have raised questions across various industries regarding contractual rights and obligations during the crisis. One contract provision in particular is garnering signification attention: the force majeure clause. Recently, these clauses have evolved from boilerplate provisions at the end of a contract to now being front and center in many contract negotiations. In this blog post, we will review considerations for drafting force majeure clauses within the current environment.
WHAT IS A FORCE MAJEURE CLAUSE?
A force majeure clause is “a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.” Simply put, a force majeure clause excuses a party’s performance under certain unforeseen circumstances. However, there is no “one size fits all” force majeure clause and the precise language of the clause can significantly impact its application. Therefore it is incumbent during the contract drafting process to identify which circumstances will and will not excuse performance and tailor the language to fit the parties’ intent.
HOW HAS COVID-19 IMPACTED FORCE MAJEURE CLAUSES?
During COVID-19, parties have turned to their contracts for relief in either excusing or enforcing certain performance obligations, with many finding their force majeure provisions either do not specifically mention pandemic or government restrictions, contain broad terms that may or not be applicable, or simply do not exist. Prior to the pandemic, parties may have felt comfortable using generalized, catch-all provisions such as “events beyond a party’s reasonable control,” or “acts of God,” because they felt this language was sufficient to capture the unthinkable.
What this pandemic has brought to light, however, is that certain catch-all provisions may be insufficient to enable a party’s nonperformance because of the varying impact of the pandemic and the fact it may hinder but not make performance impossible. Moreover, states vary in their interpretation of both force majeure clauses and the legal doctrines of impossibility and frustration of purpose. For example, New York, “will generally only excuse a party’s nonperformance if the event that caused the party’s nonperformance is specifically identified.” Therefore, it is important to specifically identify during the contract drafting process which events will and will not excuse performance.
In fact, if the performance of the contract will take place during the pendency of this pandemic, it may make sense to specifically document the impact of the pandemic. For example, a supplier may want to add a provision that says, “Buyer expressly acknowledges and agrees that it was and will not be possible for Seller to foresee, plan for, or mitigate all the consequences that the existence and spread of the SARS-CoV-2 virus may have or cause, including without limitation, the actions or recommendations by authorities.”
In addition to documenting whether a force majeure clause covers a pandemic or government imposed shutdown, there are other common provisions in a force majeure provision that should be carefully reviewed. For example, does the clause:
- require the force majeure event to prevent performance for a specific length of time before protections thereunder can be triggered (e.g., “an event lasting less than seven (7) days shall not be considered a force majeure event.”);
- give rise to other rights over time (e.g., the right to terminate the if the force majeure event continues for specific length of time, and if termination were to occur what financial obligations, if any, are the parties required to fulfil); and/or
- require the unaffected party to continue to perform when the affected party has ceased performance due to a force majeure event (e.g., “a force majeure event will not excuse a party’s payment obligation hereunder”).
Moreover, other provisions in a contract can greatly impact the application of the force majeure clause. Business Continuity and Disaster Recovery Plan requirements, Step-In Rights and emergency IP licenses, and scheduling and cancellation provisions can provide the unaffected party with protections even if the force majeure clause is broad enough to cover the situation.
Finally, as stated above, some jurisdictions narrowly interpret force majeure provisions and only excuse nonperformance if the event is specifically identified within the clause and the parties should review the impact of the governing law provision on the force majeure clause.
As previously stated, parties are contemplating force majeure clauses in ways that they never have previously due to COVID-19, and clearly identifying expectations during the contract drafting process will only aid in alleviating potential headaches and pitfalls down the road.
We hope this post has provided guidance on issues raised by the common force majeure clause. Look for other posts in our continuing Contract Corner Series.
In addition, for the latest news and Morgan Lewis publications and presentations regarding the pandemic, please visit our COVID-19 Resource Site.