Enforcing Force Majeure Clauses and Other Contractual Remedies During the Coronavirus Pandemic
Gibbons Special Alert
April 6, 2020
The coronavirus has led to widespread disruptions in the global economy and severely impacted businesses’ ability to fulfill their contractual obligations. Due to the risks posed by the coronavirus pandemic, you and your company should proactively consider reassessing your company’s contracts to understand your company’s rights, obligations, and remedies with respect to your business counterparties. In particular, if force majeure clauses have been included in contracts, you should consider whether the clauses can be triggered by or against your company.
Basic Requirements to Invoke Force Majeure Clauses:
Force majeure clauses are contractual provisions that excuse non-performance due to circumstances beyond the control of the parties. U.S. courts have generally interpreted force majeure clauses narrowly. Consequently, U.S. courts excuse non-performance based on a force majeure clause only if the clause specifically includes the event that causes a party’s non-performance. In particular, your company is in a stronger position to potentially invoke a force majeure clause if the clause contains any of the following qualifying events:
- National or Regional Emergencies
- Government Action/Interference
- Labor Stoppages
It is crucial to note that even if the qualifying event is included in the force majeure clause, your company cannot invoke the clause if non-performance was foreseeable and could have been prevented or mitigated, questions of fact to be determined ultimately by the court. Further, depending on the governing law, your company may also be required to establish that performance under the contract was impossible, rather than establishing that performance under the contract was merely financially or economically more difficult.
In addition to the above requirements, certain force majeure provisions include a mandatory notice provision. Failure to comply with the mandatory notice provision could prevent your company from raising a force majeure claim, so be very careful to determine if there is a notice provision, and do not inadvertently let a notice timing requirement lapse.
Alternatives to Force Majeure:
If the coronavirus pandemic does not constitute a force majeure event under the contract or the contract does not include a force majeure clause, your company could still seek and potentially obtain relief from non-performance by relying on the contractual doctrines of impossibility, impracticability, or frustration of purpose.
As a result of the extensive actions taken by the government, your company may be able to justify such relief under the doctrine of impossibility or impracticability. The doctrine of impossibility requires a party to establish that performance under the contract was rendered objectively impossible due to an unanticipated event. The doctrine of impracticability, on the other hand, provides relief when “performance as agreed has been made impracticable by the occurrence of a superseding event and the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic government regulation.” In P & O Containers, Ltd. v. Jamelco, Inc., the Court of Appeals of Ohio held that the invasion of Kuwait by Iraq constituted, as a matter of law, sufficient hindrance or disadvantage to justify the shipper’s decision to abandon voyage to Kuwait and not deliver the goods.
The doctrine of frustration of purpose arises when performance is possible but performance by the affected party would no longer provide it with the benefit that induced it to enter into the contract.
The Distressed Situations Team at Gibbons, part of the firm’s highly regarded Corporate Department, stands ready to assist with any of these concerns and is well-positioned to help you and your company evaluate your company’s existing contractual arrangements, including assessing any potential risks of non-performance and assessing the viability of invoking force majeure clauses. If you have any questions regarding the above issues, please contact Robert F. Coyne. In addition, we will continue to monitor the coronavirus situation and update you accordingly.
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