The ongoing Coronavirus (COVID-19) pandemic has severely impacted domestic and international economies alike and threatens the continued viability of supply chains and business operations across various industries for the foreseeable future.
As a result of the economic uncertainty and instability brought about by the current pandemic, companies of all sizes have been forced to grapple with the tangible reality that they may be unable to comply with existing contractual obligations. Generally speaking, the failure to perform under a contract exposes the non-performing party to liability under the doctrines of contract law. Nevertheless, exigent circumstances, such as those currently brought about by the Coronavirus (COVID-19) may present certain exceptions that may excuse or suspend a party’s obligation to perform under a contract. Because of various disruptions to supply chains and business operations, companies have considered invoking the force majeure clauses contained in their contracts because it may not be possible for these companies to perform under their respective contracts for reasons beyond their control.
A. What is a “force majeure” and how does it impact contractual relationships?
A “force majeure” is an event that can neither be anticipated or controlled, especially an unexpected event that prevents someone from doing or completing something that he or she had agreed to do. The term includes both acts of nature (such as floods and hurricanes) and acts of people (such as riots, strikes, and wars). In the business context, a force majeure provision excuses or suspends a party’s performance under the agreement to the extent that the failure to perform is due to certain extreme circumstances such as Acts of God, hurricanes, earthquakes, epidemics, pandemics, and other events outside that party’s control. Indeed, in order to invoke a force majeure event as a basis for non-performance of a contractual obligation, the alleged event must have been beyond the non-performing party’s control and not due to any fault or negligence of the non-performing party.
B. What does a force majeure provision contain?
While force majeure provisions vary, these provisions typically contain language which excuses one or both of the parties from performing under the contract when one of the force majeure events, specified in the contract, comes to fruition. Due to the fact that parties to a contract typically negotiate as to what constitutes a force majeure event, the list of events excusing performance will vary by contract.
Further, in order for the party impacted by the force majeure event to be excused from performance under the contract, the force majeure provision may contain language requiring the impacted party to notify the other party of the occurrence of a contractually-specified force majeure event. Alternatively, the force majeure provision may contain language obligating the impacted party to take reasonable steps to mitigate the effects of the force majeure event when it occurs.
Moreover, force majeure provisions may contain language providing a remedy, such as the ability of the non-impacted party to terminate the agreement, without subjecting itself to liability for breaching the contract, if the force majeure event lasts for a certain period of time, for example.
C. What if the force majeure provision is broadly worded to include any unforeseen event?
Nevertheless, there are instances where a force majeure provision is drafted to include “open-ended” or “catch-all” language, which is designed to capture a vast array of unforeseeable events that are not specifically set forth in the contract. For example, a provision could provide that force majeure events “include, but are not limited to, hurricanes, wars, or tornadoes.” Here, while a “pandemic” is not specifically listed, the inclusion of the phrase “includ[ing], but not limited to,” potentially allows a “pandemic” to form the basis of excusable non-performance under the contract.
In circumstances, such as that demonstrated above, the court will ordinarily determine whether the force majeure provision is ambiguous as a matter of law. In the case of an “open-ended” or “catch-all” provision, ambiguity can become an unlikely asset for an impacted party. In fact, absent a finding that a contractual provision (such a force majeure provision) is ambiguous, the court will only look to the language of the contract to determine the outcome of a contract dispute. If a court determines that a contractual provision is ambiguous, the court will interpret that ambiguous provision in light of the extrinsic evidence offered by the parties in support of their respective interpretations.
D. What if my contract does not contain a force majeure provision?
Absent a force majeure provision, a party impacted by an unforeseen event may consider invoking the doctrines of impossibility or impracticability of performance to excuse non-performance under a contract.
Generally speaking, when promised performance becomes impracticable because of some extreme or unreasonable difficulty, expense, injury, or loss, the doctrine of impossibility is available to excuse non-performance. For example, section 2-615(a) of the Uniform Commercial Code (UCC) excuses a seller for untimely delivery or non-delivery of goods where the seller’s performance has become impracticable by, among other things, the occurrence of an event that the contract assumed would not occur. In Pennsylvania, section 2-615 of the UCC has been adopted at 13 Pa.C.S. § 2615.
E. Conclusion
As companies navigate increasingly unchartered territory in light of the Coronavirus (COVID-19) pandemic, the viability of continued business operations will depend, in large part, on a company’s ability to adapt to rapidly-changing supply chain and market conditions. Evaluation of force majeure provisions will prove to be an invaluable part of any company’s risk mitigation strategy during the current health crisis.
Because force majeure provisions, like countless other contractual provisions, present various complexities that require consideration of numerous business and legal factors, it is imperative that a company evaluating a force majeure provision consult with experienced corporate counsel. In instances where a contract does not contain a force majeure provision, the need for experienced legal counsel is even greater.
For further information regarding the various business continuity issues presented by the Coronavirus (COVID-19) pandemic, contact MacElree Harvey, Ltd.’s COVID-19 response team at [email protected].
1 See FORCE MAJEURE, Black’s Law Dictionary (11th ed. 2019).
2 Id.
3 Force Majeure Clauses: Key Issues, Practical Law Practice Note 5-524-2181
4 See Martin v. Com., Dep’t of Envtl. Res., 120 Pa.Cmwlth. 269, 273, 548 A.2d 675, 678 (Pa. Cmwlth. 1988).
5 STI Oilfield Servs., Inc. v. Access Midstream Partners, 2017 WL 889541, at *12 (M.D. Pa. Mar. 6, 2017) (citing Hutchison v. Sunbeam Coal Corp., 519 A.2d 385, 390 (Pa. 1986)).
6 Driscoll v. Arena, 2019 PA Super 190, 213 A.3d 253, 259 (Pa. Super. 2019).
7 STI Oilfield Servs., Inc. v. Access Midstream Partners, 2017 WL 889541, at *12 (M.D. Pa. Mar. 6, 2017) (citing Sanford Inv. Co. v. Ahlstrom Machinery Holdings, Inc., 198 F.3d 415, 421 (3d Cir. 1999)).
8 Albert M. Greenfield & Co., Inc. v. Kolea, 475 Pa. 351, 355, 380 A.2d 758, 759 (Pa. 1977)
9 Force Majeure Clauses: Key Issues, Practical Law Practice Note 5-524-2181.
