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Practical Considerations Surrounding the Applicability of Force Majeure Clauses in the Midst of COVID-19

03/25/2020

We are living in a time of uncertainty. Every day, you learn new ways in which your business is and will continue to be affected by COVID-19. As more and more restrictions, shutdowns, and governmental orders go into effect, one thing does become certain: your business does not operate in a vacuum. The new reality of COVID-19 may mean that you are unable to meet your contractual obligations. Conversely, it may mean that your contract counterparty cannot satisfy their obligations to you. It’s no one’s fault, but one party will take the blame - or will they?

Force majeure clauses are commonly found in commercial contracts to allocate risk in situations where one or more parties’ contractual obligations are made impossible (or nearly impossible) by unforeseen events outside of the parties’ control. These are often referred to as “acts of God” clauses, although these phrases are not always synonymous. While it may seem obvious that COVID-19 would constitute a force majeure, this is not necessarily the case. Below is a checklist to help you make informed decisions with respect to enforcing or defending against the enforcement of a force majeure clause to excuse nonperformance under the contract.

  1. Identify whether your contract contains a force majeure clause. Not all contracts have them. Relatedly, if there is such a clause, review your contract to determine the state whose law governs the interpretation and application of the contract.
  2. Does your force majeure clause cover COVID-19? Again, your first instinct is likely, “Of course!” But be aware: many clauses do not contemplate excusing nonperformance for diseases like COVID-19. Look for words or phrases like “pandemic,” “epidemic,” “public health emergency,” “outbreak of communicable disease,” or the like. Alternatively, some force majeure clauses apply in the event of government orders that make performance impossible. If none of the above work, look for catch-all phrases such as “acts of God” or “events beyond the control of a party.”
  3. Is COVID-19 the reason for nonperformance? The party seeking to excuse their nonperformance must tie the occurrence of COVID-19 and related restrictions to the reason that the party cannot perform its obligations. Be wary of contract counterparties attempting to delay or decline performance by taking advantage of COVID-19 without showing how it negatively affects their obligations. In some, but not all states, the fact that performance may be more difficult or expensive is not a valid excuse for failing to perform.
  4. How does the force majeure clause allocate risk? This item involves two distinct questions. First, does the contract allow one or both parties to take advantage of the force majeure clause?  Second, what is the effect of the force majeure clause on the party seeking to take advantage of it? These clauses can merely alter the time for performance, or they can excuse it completely. In some circumstances, they can allow the party to terminate the agreement. The effect of the clause may counsel against invocation of force majeure. Which leads us to the final item on the checklist . . . 
  5. What do you do? If you want to claim a force majeure, how will this affect your business? Termination of a contract could permanently damage a business relationship. We recommend beginning an honest dialogue with your contract counterparty about the necessity of delay or termination. Take steps to begin mitigating the impact of the force majeure event, such as seeking alternative locations to perform the contract, securing new suppliers, working remotely, and anything else that may minimize both parties’ losses. If your counterparty seeks to invoke force majeure, we recommend seeking substantiation and documentation of why they think the clause applies and how they believe it affects their ability to perform under the contract.

One last hint. For sellers of goods in Colorado, C.R.S. § 4-2-615(a) allows for delays in delivery and even non-delivery in one of two situations: (1) when delivery is hampered by “[u]nforseen supervening circumstances” that the parties did not expect when they entered into the contract; or (2) when the seller is required to comply with “an applicable . . . domestic governmental regulation or order . . .”  This provision is limited to sellers of goods and does not apply to contracts for services, including leases and loan agreements.  

For these and any other issues your business might face in the wake of the COVID-19 epidemic, we are here to help. Contact Vika Chandrashekar for additional details or questions regarding force majeure.

ABOUT THE AUTHOR

Vikrama S. Chandrashekar

Attorney