The recent outbreak of the coronavirus (“COVID-19”) has quickly evolved from a local issue to a global health emergency. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic. In this time of uncertainty, many businesses are facing concerns with the performance of their contracts affected by the coronavirus outbreak.
One common question asked by businesses is: What happens to a contract when their performance is affected by the coronavirus outbreak? The answer to this question lies in the force majeure clause of the contract. It is called a boilerplate clause i.e. a provision that is generally present in a standard contract. Here, we understand what is a force majeure clause and how it may be helpful in the context of COVID-19 outbreak.
A. What is a “Force Majeure” clause?
A “force majeure” clause is used to define a contractual term that relieves the parties from performing their contractual obligations when certain circumstances beyond their control arise, making performance impractical or impossible. Example: a music concert is cancelled due to the nation declaring a state of medical emergency in light of the COVID-19 outbreak. The event organizer could not have foreseen a situation like this, and the outbreak would make it impossible for the organizer to hold the concert on the stipulated day. Under such circumstance, the event organizer can claim force majeure for non-performance i.e. cancelling the concert.
Force majeure clauses can also include remedies, as agreed between the parties, such as an extension of time to perform obligations or suspension of performance for the duration of the force majeure event. Some clauses may even allow the parties to terminate the contract if the force majeure event extends over a longer period.
B. What are the different kinds of events that fall under force majeure?
Determining which types of circumstances will be covered by the force majeure clause is essential. Generally, any force majeure event requires to satisfy these 3 criteria:
- Unavoidable i.e. the affected party, after taking all reasonable steps to mitigate the event or its consequences, we’re unable to do so.
- Unforeseeable at the time of entering into the contract i.e. the event was unexpected or sudden, and beyond the reasonable control of the affected party.
- Impossible to overcome i.e. the ability to perform obligations under the contract was prevented or hindered by the event.
“Acts of God” events are usually always stated in a force majeure clause. They consist of natural disasters such as floods, earthquakes, hurricanes, tornadoes and so on. In addition to “Acts of God”, force majeure clauses may also cover events like war, civil disorder, terrorism or threat of terrorism, national emergency, government order, labor strikes, epidemics or outbreaks.
C. How can an affected party invoke the force majeure clause?
The main requirement to invoke a force majeure clause is to have a link between the force majeure event and the affected party’s failure to perform their obligations under the contract i.e. the affected party must establish that the force majeure event was responsible for non-performance.
Typically, the affected party’s right to relief for force majeure is conditional upon the issuance of a notice to the other party. The affected party must notify the counterparty of the force majeure event promptly or in a timely manner, as stipulated in the contract. The contract may additionally require the notice to state the anticipated consequences and duration of the force majeure event. Failure to provide a prompt or timely notice may result in the affected party becoming liable for all losses suffered by the counterparty due to the affected party’s non-performance.
Unlike a natural disaster, which is usually limited in time and confined to a particular geographical region, the COVID-19 outbreak has the ability to multiply rapidly and unexpectedly across multiple countries. In such a circumstance, parties could consider executing an emergency postponement or suspension agreement to modify their existing contract that takes into account the developing impact that the outbreak has upon the performance of their obligations.
D. How can businesses cope with a force majeure event?
There is no one-size-fits-all solution to dealing with force majeure events. For example, the legal consequences of the COVID-19 outbreak on the relationship between parties will vary depending on the nature of the contract, type of obligations under the contract and the nature in which the obligations are to be performed. Businesses are advised to consider the following steps:
- Review your contract thoroughly and identify the force majeure clause or any other provision that can be relied upon during the happening of a force majeure event.
- Analyze the definition of force majeure in your contract to determine whether there is any express event incorporating the event that is taking place and, if not, whether the general language is sufficient to include such an event and its consequences. Example: the force majeure definition in your contract will not have a mention of COVID-19, however, COVID-19 could fall under the bracket of “disease/outbreak/epidemic/pandemic” and thus, be covered under force majeure.
- Take note of any timelines specified to invoke the force majeure clause i.e. the time frame within which you need to inform the other party of such an event by means of a notice.
- Check if there are any remedies available, such as an extension of time to complete the performance of your obligations, or suspension of your performance till the time the force majeure event subsists.
Another very important advice to businesses, keeping in mind that the outbreak is having and will continue to have a profound impact economically, is that if you are entering into new contracts make sure the force majeure clause is strategically drafted to safeguard your interests and covers eventualities like COVID-19.
Conclusion
The outbreak has dented the economy gravely and this is an issue that is becoming more important by the day. Naturally, many businesses are affected in one way or the other. While the affected parties will claim force majeure for non-performance, we urge the counterparties in such situations to understand the severity of the situation and empathize with the affected parties. COVID-19 could further spread to new regions and with the impact it already had, it could take months before we can get back to normalcy both in terms of our social and professional lives. We hope to solve any challenges that come our way as we venture into this brave new world.
Author: Krishna Parekh, Law Clerk at NH Legal
L.L.M Candidate at UCLA School of Law, 2020