Written by David Gross
We are currently facing very turbulent times with the rapid spread of the novel coronavirus (“COVID-19”) that was first reported in Wuhan, China at the end of 2019. On March 11, 2020, the World Health Organization declared COVID-19 to be a pandemic. State officials responded immediately, declaring state-wide emergencies and mandating certain closures and restrictions. In the State of Alaska, Governor Dunleavy issued a state-wide emergency declaration the day the WHO identified COVID-19 as a pandemic. While it is too early to tell, it is certainly possible that COVID-19 will have a significant and long-term impact on trade and commerce, which could irreparably damage businesses, large and small. These unanticipated economic impacts may require certain companies to evaluate whether they can follow through with certain contractual obligations. In such a situation, close attention should be paid to whether there is a “force majeure” clause in the contract.
Force Majeure is a French term meaning “a superior force.” It has it’s roots in French and English law and has existed as a legal concept in America for centuries. For example, a West Virginia court in 1881 described force majeure as an “extraordinary convulsion of nature or a direct visitation of the elements, against which the aids of science and skill are of no avail.” In laymen’s terms, force majeure generally happens when unforeseeable circumstances make it impossible to meet contractual obligations. In modernity, the doctrine of force majeure is typically found as a provision in most major contracts.
The application of a force majeure clause will relieve a party from their obligations under the contract. An event that would trigger this clause would be an occurrence that is outside the party’s reasonable control and which prevents that party from performing. A party’s ability to claim relief for a force majeure event will depend on the specific terms of the contract and the type of event that has caused the non-performance. Force majeure provisions are express terms and will not ordinarily be implied into contracts.
The “test” for the applicability of force majeure clauses usually requires the satisfaction of three distinct criteria: (1) the event must be beyond the reasonable control of the affected party; (2) the affected party’s ability to perform its obligations under the contract must have been prevented, impeded, or hindered by the event; and (3) the affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences.
When determining if an event triggers a force majeure clause, it is very important to look at the language of the contract itself. Many contractual provisions set out a specific list of force majeure events, which are deemed to be events beyond the control of the parties, such as “pandemics,” “epidemics” or “diseases.” A specific reference to a “pandemic” will make it easier to bring a force majeure claim related to COVID-19, but a party will still have to satisfy the other criteria set forth above.
If the force majeure provision does not include language specifically referencing a “pandemic,” it could still be a force majeure event if the clause includes language referring to an “act of God” or an “action by government.” In most situation, a pandemic would properly be seen as an “act of God.” A pandemic could also result in actions by governments, such as limiting people from gathering or restricting travel, which would likely qualify as a force majeure event. It is important to bear in mind that the relevant force majeure event need not be COVID-19 itself. The consequences that actions taken to protect against COVID-19 or that result in reaction to COVID-19 may also warrant coverage under the force majeure provision.
The existence of a force majeure event is not enough to guarantee coverage under a force majeure provision. In order to qualify for relief, a party must also show a causal link between the impacts of COVID-19 and its inability to perform. For example, if a company is unable to fulfill its contractual obligations because the employees needed to perform the contract have all been placed in government-ordered quarantine, that would likely be sufficient to show this causal link. On the other hand, a disruption that merely impacts the profitability of a contract will likely not be sufficient to trigger a force majeure clause.
Finally, a party seeking to rely upon a force majeure provision will usually have to show that it has taken all reasonable steps to avoid or mitigate its damages, and that there are no alternate means for performing under the contract. What constitutes a reasonable mitigation measure is fact-specific and depends upon the nature and subject matter of the contract in question. For example, if a company is required to quarantine those workers that would have performed under the contract, this company would have to show that there were no other workers, not under quarantine, that could have been hired to fulfill the contract. In determining if a party did all they could to mitigate their damages, the reasonableness of the mitigation measures will be considered.
As our global and domestic economy struggles to react to the implications COVID-19, companies must prepare for varying scenarios. As the situation continues to unfold, the following proactive steps may assist small and businesses alike in weathering the COVID-19 crisis:
• Review your company’s contracts to determine whether they include a force majeure provision and, if so, carefully review the definition of force majeure to determine whether there are any express events, such as pandemics or “acts of God,” that would apply. If there is no specific language, look to see what the general language or “catch-all phrases” say with regard to what event would trigger the force majeure clause.
• Consider and review what steps you are taking as a business to avoid, or at least reduce, the possible effects of COVID-19 upon your company’s work force and it’s ability to continue to perform the obligations of your contracts. It will be important to be able to show that your company has taken all reasonable measures and followed all official guidance.
• Review financing or other related documents to determine whether there are any notice provisions that must be complied with in relation to anticipated or actual force majeure claims.
• Determine whether insurances, such as business interruption insurance or force majeure insurance, may cover any of the expected losses.
Hopefully, the impact of COVID-19 will not be as severe as currently expected. However, either way, it is important to understand your company’s contractual rights and responsibilities and to use all of the provisions in its contracts to its advantage.
If you have any specific questions about how to construe a force majeure clause in a specific situation, please don’t hesitate to contact Birch Horton Bittner & Cherot for assistance. Our attorneys are working diligently to understand the legal ramifications and risks created by COVID-19 and to use existing laws to protect our clients and our community from these risks.