{Member Insights} Effects of COVID-19 on Business Contracts: Force Majeure Clauses

The FACC-NY network is composed of a diverse mosaic of talented, experienced, and open-hearted professionals united by a desire to share their knowledge, nurture meaningful connections and succeed professionally. In this new Member Insights series, we invite guest members to contribute timely and relevant tips for adapting your activities to overcome immediate challenges and plan for the long-term. 

Deborah Nilson is the founding partner of The Nilson Law Group, PLLC. The Nilson Law Group is a French-speaking New York-based law firm, focusing on the creation, acquisition and representation of American subsidiaries of foreign companies.  Deborah is a member of the Women in Business Committee of the French American Chamber of Commerce.

Michael Vaz D’Almeida is a French avocat and an associate (NY Bar Admission Pending) at The Nilson Law Group, PLLC.

Keep reading to read Deborah and Michael's collaborative piece on the effects of the COVID-19 pandemic on business Contracts, focusing on force majeure clauses...

The novel coronavirus (“COVID-19”) pandemic is disrupting many businesses all around the world. While most businesses shuttered in response to orders from authorities, two crucial questions remain: can my obligations to perform under existing contracts be excused or delayed due to the occurrence of the COVID-19 and can COVID-19 be considered a force majeure defense?

First of all, a force majeure event defined as an event that can be neither anticipated nor controlled and that may arise from acts of nature (otherwise termed an “act of God,” e.g., an earthquake) or of individuals (e.g., a riot). Force majeure clauses are contractual provisions that can excuse non-performance, permit delaying performance, allocate risk, or limit liability, when performance becomes impossible as a result of a triggering event beyond the control of the parties.

As opposed to French law, where the concept of force majeure is codified, under U.S. law, the applicability of force majeure requires an express contractual provision, which may vary substantially from one agreement to another.  For instance, unless heavily negotiated by tenants, force majeure clauses in commercial leases (if included at all) are frequently drafted in such a way so that only the landlord’s performance may be excused, not the tenant’s.

In general, to determine whether a force majeure clause is applicable, U.S. courts will look at three criteria, whether: (i) the event was expressly included as a qualifying event under the provision; (ii) the risk of non-performance was foreseeable; and (iii) the performance was truly impossible. Most courts construe force majeure clauses narrowly and the legal assessment varies from state to state.

If the clause lists among qualifying events “pandemic” or “epidemic,” the World Health Organization’s declaration classifying COVID-19 as a pandemic would likely lead to a court’s application of the provision (assuming the other two criteria are met). Other less specific events such as “governmental orders,” “disasters,” or “national emergencies” may also cover COVID-19 and its consequences, e.g. Governor Cuomo’s “New York State on PAUSE” executive order under a “governmental order” event.

If a contract lacks a force majeure clause, U.S. courts will likely reject the claim. In that case, the non-performing party may still assess the applicability of common law doctrines of impossibility, impracticability, or even frustration of purpose.

In any case, negotiation among counterparties is essential during all steps of the relationship, from drafting the agreement to enforcing the provisions thereof. For instance, unless a service contract specifically excuses the obligation to pay the fees when due during a pandemic, the party’s obligation may remain applicable during such a force majeure. However, even lacking an express contractual provision that would apply, parties may both have an interest in renegotiating for the sake of their long-term relationship (e.g., fees to be postponed or even subject to abatement).

Furthermore, in some instances, if a party does not make efforts to mitigate the damages derived from the non-performance, it may be found liable. Such party must take “reasonable measures” to reduce the amount of harm suffered through any form of substitute performance that may be permitted under the language of the provision and applicable law, such as, for example, offering a partial shipment, finding a third-party to perform, or postponing the performance instead of canceling it.

In addition, a party wishing to notify its counterparty that it wishes to invoke a force majeure provision should proceed with caution. The notifying party should not expressly state that it has no intention to perform, as such a statement may permit the counterparty to invoke the anticipatory breach or repudiation doctrine, potentially having unintended adverse consequences for the notifying party (for example, triggering a default and accelerating payments to be due). Rather, it should demonstrate that it is willing to be flexible and it wants to find a beneficial solution for all the parties involved.

For the reasons above, it is thus imperative to initiate negotiations with the other party, the sooner the better, to memorialize any attempts or agreements in writing, and to choose one’s words carefully when communicating regarding performance under a contract.

This article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. To learn more about The Nilson Law Group, PLLC please visit our website here.