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Supply Chain Interruption: Force Majeure Clauses and COVID-19

Posted by Res Nova Law | May 15, 2020 | 0 Comments

As business has slowed due to the coronavirus pandemic, anxiety about supply chain disruption has increased. One step any company struggling to meet its obligations under contracts can take is to review its distribution, event and supply contracts for a clause known as the Force Majeure Clause. This clause is present in most commercial contracts and serves to excuse a party's performance of its obligations under the contract when circumstances beyond the party's control arise to make performance impossible. Recent governmental actions taken to combat COVID-19 and the resulting closures, shortages and limitations on public gatherings are likely to generate an increase in the number of parties hoping to avoid having to perform under contracts. 

A Force Majeure Clause lists a number of extraordinary events that, if they occur, can completely excuse or allow for a delay in a party's performance. Common examples include “acts of God,” war, terrorist attacks, strikes, fire, famine and – in some cases – epidemics and pandemics. Importantly, courts have interpreted these clauses strictly, meaning that if the event isn't listed, it most likely won't be effective to excuse performance[1]. If the Force Majeure Clause in your contract includes pandemics, epidemics or disease, it is possible that the COVID-19 pandemic and governmental action relating to COVID-19 will qualify as a Force Majeure event. It is even possible that the COVID-19 pandemic will be considered an “Act of God” and thereby, qualify as a Force Majeure event. 

If you intend to rely on a Force Majeure Clause in dealing with your business partners, consider doing the following: 

·      Provide timely notice of your intent to delay or stop performance. Failure to provide such notice may result in your waiver of your ability to obtain the relief available under the clause. You must also show that you have done all you can to mitigate the damages resulting from your non-performance in order to successfully invoke the clause. 

·      Review your Force Majeure Clause for a “carve-out” for payment obligations. If your only obligation under the contract is payment (such as for a lease or purchase of goods) you may instead need to rely on other provisions in the contract, such as the termination provision.

·      Keep detailed records of why you cannot complete performance, such as the government decrees impacting your performance, the number of employees unable to work, and similar impacts on similarly situated businesses. These records will come in handy if you have to litigate the issue.

·      Review your contract for a provision allowing the other party to terminate if your non-performance extends for a long period of time. Consider whether your invocation of the Force Majeure Clause might result in termination of the contract and how that might affect your business. 

·      If your contracts don't contain Force Majeure provisions, or if such provisions don't specifically provide for pandemics or the like, you may need to rely on the common law doctrines of impossibility, frustration of purposes or, in some jurisdictions, impracticability. 

·      Be careful about arguing positions on your company's behalf that you resist when made by your business counterparts. Should litigation ensue, these inconsistent positions could undermine your case. 

·      Review your business insurance policy for “Business Interruption” coverage and provide timely notice to your carrier of your intent to file a claim if it seems likely that COVID-19 is a covered “peril” under your policy.[2]

Going forward, businesses should consider amending their contracts and obtaining insurance riders that contain Force Majeure and other language covering pandemics, epidemics and communicable diseases. What we have learned from the SARS outbreak and now the COVID-19 pandemic is that these events are likely to re-occur in the future and it is prudent to prepare for them in advance. 

[1] In cases where the Force Majeure Clause includes language such as “and other similar events,” courts have allowed events that are similar to the events listed to be considered a Force Majeure event. 

[2] For more information about the use of business interruption coverage for losses related to COVID-19, click here for Business Interruption Coverage and the Coronavirus Pandemic.

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