Before the onset of the COVID-19 pandemic, your business ran without a hitch. Supplies came in a timely manner. Employees came to work per usual. Contracts were performed and completed by the due date. Then, the world changed. Suppliers ran out of inventory and either filled orders late, or not at all. Similar problems arose with other vendors. Some simply closed their doors. Some employees contracted the virus, and took either short or longer-term leave, or never returned. Replacing suppliers, vendors and employees was difficult, and sometimes, impossible.
Your business’s ability to perform and provide products and service suffered. Some orders were filled late, or never filled; or services were performed after deadline, or never. Some customers suffered loss as a result and sued your company for damages. It just does not seem fair. You didn’t cause the pandemic.
How could it be your company’s fault? How could your business be held accountable? What can you do if something like this occurs again? Can your company avoid or minimize your obligations and responsibility?
Yes, if your contracts with your customers include a force majeure provision.
Force Majeure Contract Clause
A force majeure clause in a contract addresses the possibility, however remote, that certain events beyond your control may occur that hinder or render impossible your ability to perform, and either permits you to perform once the interruption ceases, or even terminate the agreement.
In other words, a non-performing party may use a force majeure clause as excuse for non-performance for circumstances beyond the party’s control and not due to any fault or negligence by the non-performing party. The most typical of such occurrences is commonly referred to as an “act of God.” However, world events have expanded general acceptance of several other events as force majeure, such as: severe weather, fire, flood, war, riot, insurrection, shortages in supply chain, and labor strikes. This frees both parties from obligation if any of these extraordinary events directly prevents one or both parties from performing.
Due to COVID-19, some force majeure provisions now also reference pandemic.
Some Limitations Might Apply
A force majeure provision, however, does not apply absolute protection from liability for nonperformance. Mere impracticality or unanticipated difficulty is not enough to excuse performance. Economic hardship, as a general rule, will not suffice as a force majeure event since such may regularly occur, and can be appropriately and preemptively addressed in the contract in other ways by allocating such risk through the inclusion in the agreement of other appropriate terms and conditions.
Moreover, some jurisdictions will only enforce force majeure clauses with respect to only those events specifically mentioned or avoid enforcement of broadly described conditions. For example, the term “severe weather” may be deemed vague and overly broad, but if your company routinely delivers to the Caribbean Islands, including a specific reference to “hurricanes” as a force majeure event might be deemed enforceable.
Just as the mere reference to “severe weather” may not be specific enough, reference in the contract generally to pandemic may not be adequate, either. Moreover, and arguably, it was not necessarily the COVID-19 virus, but the governmental orders concerning non-essential businesses that resulted in company closures and kept employees at home, at least in the early stages of the pandemic. This rendered performance impracticable, or in some cases impossible – begging the question whether a reference to pandemic in a force majeure clause is adequate.
Likely, the better practice is to draft a more expansive provision specifically referencing government-ordered closures and other measures hindering or preventing commerce and the company’s timely or total ability to perform.
For More Information
The attorneys at Kelleher + Holland, LLC can review your key contracts and other documents your business uses to transact its daily business, assist you with identifying areas of risk, and help to modify your transaction documents to lessen or mitigate to that risk. For more information or to contact our corporate attorneys, visit our website at kelleherholland.com, or call our corporate group for a free consultation.