COVID-19 and Your Contracts

COVID-19 and Your Contracts.
Force Majeure - An Obscure Contract Provision with Big Implications

As the nation struggles with the impact of the novel coronavirus (COVID-19) business leaders and risk managers across the country are focused on obscure force majeure (“superior force”) provisions to understand their rights and obligations in commercial contracts.  These boilerplate provisions, often ignored and minimized, have the potential to dramatically impact the long-term survival of many companies.

A force majeure event is found in unforeseeable circumstances preventing or hindering a party from fulfilling its contract obligations.  In many settings, from public construction projects to small restaurants, businesses are experiencing extremely unusual and unpredictable circumstances from COVID-19 — in their supply chain, customer base, labor force, access to buildings and project sites, disruption to primary services, and many other fundamental areas.  Businesses are shut down by government order, or trying to work remotely, while employing social distancing and other safety measures amidst an ever-changing pandemic landscape.  With this backdrop, many businesses are taking the position that their contract performance is excused without liability due to COVID-19.  However, their specific contract language will determine whether such positions will ultimately prevail.

There are many important considerations in the evaluation of potential force majeure situations:

Contract Language – Is there a general definitional reference to an “event beyond the parties’ control,” or more specific reference to “disease,” “epidemic,” “pandemic,” “quarantine,” “acts of government” or similar event-specific language; or are both general and specific terminology in the force majeure provision.  Depending on the jurisdiction and circumstances a broader force majeure provision may allow latitude for interpretation while in other jurisdictions the absence of specific reference to the type of event experienced may foreclose reliance on the force majeure provision to excuse performance.  The categorization of force majeure events can be further articulated between “political” force majeure for political/legal events, and “natural” force majeure events such as a pandemic, which may lead to different outcomes under the parties’ agreement.  Other language requiring the prevention of a party’s performance by the force majeure event, rather than simply disrupting or hindering performance, may distinguish whether the force majeure provision is applicable to a party’s particular claim.

Who Interprets the Force Majeure Provision – Many commercial construction contracts require that an “initial decision maker” review a force majeure claim to determine whether relief is afforded under the contract.  These initial decisions are often made by another party to the project or the subject of the agreement, and may be a pre-condition to mediation, binding arbitration, litigation or other negotiated dispute resolution protocol under the parties’ contract. Other contracts allow force majeure claims to be asserted directly through litigation or arbitration proceedings.  The parties’ selection of the law to be applied to contract disputes, from specific state law jurisdiction to incorporating federal arbitration statutes, will impact the presentation and evaluation of force majeure claims.

Notice Requirements and Claim Submission – Most contracts include a prompt written notice requirement (as short as 7 days) for the assertion of claims (often described as a demand for monetary damages, time extension, or other relief under the contract terms), including presentation of disputes to initial decision makers, or to the party from which relief is demanded.  In some jurisdictions failure to provide timely written notice will operate to preclude any relief for force majeure events.

The Cause of the Non-Performance and Mitigation – Did the party claiming force majeure undertake proper precautions that could have allowed performance, or partial performance, or did the party’s conduct contribute to the non-performance (e.g., failing to timely schedule material delivery). Could the party claiming force majeure have timely performed in the absence of the disruption.  Could the company have performed through alternative means (e.g., adding more staff; working remotely; using a third party, etc.). 

Is Later Performance Possible – In many settings, contract delays are contemplated by the parties and addressed in their agreements.  For instance, if materials are delayed for a construction project due to inclement weather, or through another party’s delay or neglect, the project schedule may be adjusted for performance due to the circumstance.  Depending on the contractual language negotiated, parties may have a required protocol for addressing delayed performance without triggering a force majeure claim.

Other Relevant Contract Provisions – How do other contract provisions relate to and impact the claimed force majeure situation.  Commercial contracts often include suspension and termination provisions applicable through specific notice and an opportunity to cure non-performance, including liability for monetary damages.  Alternatively, the parties’ force majeure provision may relieve a party from liability for non-performance. 

What is the Relief Under the Contact – Depending on the specific contract, the force majeure provision may allow for adjustment of time, additional compensation, or other equitable relief.  Other negotiated force majeure provisions may eliminate a party’s rights to damages, or modify the provision requiring a reasonable extension of time to perform as the sole and exclusive remedy for claims arising from a force majeure event.  There may also be specific language placing the burden on the party claiming force majeure relief to substantiate and quantify any  delay, and provide a recovery plan and recovery schedule acceptable to the other contracting party.

The COVID-19 pandemic may have serious and long-lasting impact on businesses.  It is vital that business leaders and risk managers take steps now to evaluate force majeure and related provisions to understand their contractual obligations, and effectively and timely act to protect their rights.

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Shamus O’Meara leads the Construction and Business Contracts groups at O’Meara Leer Wagner & Kohl.  He represents and guides a diverse group of clients from multinational corporations to emerging businesses, school districts and educational institutions, employers, and families. He serves as a mediator and arbitrator for construction, commercial and educational disputes, and as an expert witness and consultant for school and business safety and liability matters. 

Shamus and colleague Mark Azman are providing business and contract guidance to businesses and school districts impacted by the COVID-19 pandemic.

Shamus O'Meara                                         Mark Azman