How “Force Majeure” Clauses Will Affect Your Business During COVID-19

Do you know if your contracts contain a “force majeure” clause? If not, you could be missing out on some large protections for your business during local and national emergencies.

What is a “force majeure” clause?

Force-majeure clauses are fairly common in negotiated contracts and are valuable in determining whether a party is require to perform when significant issues occur outside the party’s control. Things that might trigger a force-majeure clause include the shelter-in-place orders we have recently seen issued by state and local governments in response to the COVID-19 pandemic. If performance is prevented as a result of circumstances outside the control of the parties, force-majeure provisions will be relevant to assess a party’s right to suspend or, in the event of prolonged situation, terminate a contract.

When are force-majeure clauses enforced?

Whether a catastrophic occurrence, such as the COVID-19 pandemic, is a force-majeure event will depend on the specific contractual provision as well as the extent to which it made a party’s performance impossible. Things to consider in making this evaluation include:

  • The extent to which the contract provides for suspension of performance or termination;
  • The factors used in determining whether a force majeure event occurred;
  • The extent to which the force majeure event actually prevented the party from performing;
  • Whether the party asserting force majeure had the ability or obligation to mitigate the effects of the event;
  • How well the party seeking to be excused from a contract keeps records with respect to the business interruption and the factors leading to impossibility; and
    Possible insurance coverage.

Keep in mind that force-majeure clauses are not applied absent a contractual provision. That is, if your contract does not contain such a clause, you will likely not be excused from compliance with your obligations. On the flip side, if you are seeking to enforce a contract that does not contain a force-majeure clause, you may be able require compliance if the contract does not contain such a provision. There are other common-law doctrines that may apply, such as “frustration of purpose,” “impracticability,” or “impossibility.” However, these are generally outside the terms of the contract and much more difficult to establish.

Ultimately, practical business realities will control when and how you assert these rights. It is always good business practice to: (1) establish long-term business relationships, so that you have a reserve of good-will to draw upon in times of difficulty; (2) have a plan in place to resume operations as quickly as possible after an emergency; and (3) be as detailed as possible about the kinds of situations you want to protect against when negotiating and drafting your agreements. To that end, you should consider whether to expand or clarify the force-majeure clauses in your contracts to include more explicit references to either COVID-19 or its anticipated effects.

A careful review the appropriate force-majeure clause for your business is a must, and the definition, scope, and duration of force-majeure clauses will now be a focus of increased negotiation. Contact us today so we can discuss with you how COVID-19 and other health emergencies or natural disasters will affect your business operations.

Gerry Cassioppi
Gerry Cassioppi
Gerry Cassioppi
Gerry was a partner at the firm through June 2021, when he retired.