Force Majeure Clause & Other Defenses in Contract Law Because of Covid-19

The Global Impact of Covid-19 Cannot Be Understated

The global impact of Covid-19 cannot be understated. Businesses are shut, employees are at home, and the supply chain is breaking. What rights do parties in a contract have because of the Covid-19 impact? Force majeure clauses and other principles of contract law are discussed here. Covid-19 has brought force majeure clauses and other defenses into the spotlight, with countless people who are party to a contract wondering:

Does Covid-19 qualify as a triggering event? Can I get out of my current contract? How can I force the other party to stay in the contract?

A. The Force Majeure Clause

A force majeure clause is a provision within a contract that essentially relieves one or both parties of contractual obligations when certain unforeseeable circumstances arise. These circumstances are referred to as “triggering events.” Generally speaking, FM clauses are pretty cut-and-paste. Historically, most parties tend to ignore the clauses, such as the force majeure or choice of law clauses, at the end of the contract. But Covid-19 puts them in play. The FDA has suspended many international and domestic inspections, thereby comprising a suppliers ability to supply products to a buyer. This can lead to stock-outs, failure to supply penalties, shelf-stock adjustments, etc.

Triggering Events

At the outset, invoking the clause is usually intensively fact-specific. Whether Covid-19 qualifies as a triggering event under your contract’s force majeure clause depends largely on the language used and the State law governing the contract interpretation. Clauses can be very specific when establishing qualifying events, or they can be relatively vague. Under general principles of contract law interpretation, specific words are not usually given wide breadth. Further, the clause will be examined to see if the parties actually allocated risks of performance or non-performance, and if so, courts will give fidelity to that allocation of risk. Some States require that the triggering event be unforeseen and/or beyond the party’s control. And other States may also impose a duty to mitigate or otherwise try to resolve the issue before invoking the cause. If any of the following triggering events are listed in your FM clause, Covid-19 may have an impact on the contract.

Epidemic, pandemic, or outbreak of a communicable disease
Quarantine
National emergency
Act of God
Supply chain disruption
Transportation disruption
Inability to obtain materials, components, power, or fuel
Disruption of labor force

In some cases, the force majeure clause will include a catch-all phrase, such as “or other causes beyond the control of one or both parties.” But regardless of language, the other party to your contract may argue against your stance.

Direct or Indirect Causation

In addition to the language within your contract, the actual circumstances of your case will factor heavily into the outcome. For example, has a significant portion of your workforce actually fallen ill with Covid-19? Has an event space closed, or has a facility that produced your supplies stopped producing? Direct causes such as these illustrate a clear impact. While some States actually require direct causation, others permit indirect causation in certain circumstances. For example, a production facility may effectively shut down because of a governmental order even though none of the employees actually are sick. Thus the producer may argue that the government order is the primary event that “downstream” caused employees to not come to work, and thus the producer could not produce the goods to deliver. The State law choice may impact if direct or indirect causation helps or hurts the producer.

Due to the unprecedented nature of this pandemic, there is no one-size-fits-all answer to the question of whether a force majeure clause covers Covid-19. If, however, your contract uses words like pandemic, epidemic, or outbreak, and/or your State allows both direct and indirect causation, one or both parties may be able to break a contract due to this pandemic.

B. Other Defenses Under Contract Law

Other common-law defenses may help such as: (i) Impossibility, (ii) Impracticability, or (iii) Frustration of Purpose. The Impossibility defense is what is appears to be: it is just not possible for a party to perform. For example, if the contract required a specific person to perform a specific act, then it would be impossible to perform if that person died or was otherwise incapacitated. Another example is where an item or product that is crucial to performance has been destroyed and no reasonable substitute exists. A third example is where a new law is enacted that makes performance of the contract illegal.

Some State-laws incorporate Impracticability within Impossibility. Some keep the theory separate. The UCC includes the defense of Commercial Impracticability for contracts for the sale of commercial goods. Impracticability applies if, after the contract execution, an unforeseen event happened that makes performance unreasonably difficult or unduly expensive. Contract law presumes that parties negotiate risk allocation and thus the triggering event usually must be reasonably unforeseen nor within a party’s control. The key is that most courts will insist on proof that the performance is so expensive or performance is so unduly hard. Events that make performance more expensive is not enough.

And finally, the defense of Frustration of Purpose may also apply. This defense applies when the basic value of the performance and the basic underlying rationale for entering into the contract, has been destroyed or rendered meaningless by unforeseen events. The defense usually requires proof that: (1) the purpose that is frustrated must have been a principal purpose of that party in making the contract; (2) the frustration must be substantial; and (3) the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made.

C. Practical Considerations

In drafting new contracts for clients, our gut instinct is to include required new words into a contract. But we always ask the client whether it is good to do so because the new triggering events could equally apply to another party. It may not be possible to get a contract clause agreed where the new language is for one party only. But in general, in drafting new contracts today, prudence dictates including words or phrases like pandemics, epidemics, viral/bacterial contagions, shelter-in-place, lock-down, or the like.

Another consideration is to look at the choice of law provision. You can still have a different venue provision but have a more favorable choice of law provision based on the most applicable State. For example, if as a party you do not want to let the other party invoke a force majeure easily, you may wish the choice of law State to be one that has a narrow application of the clause. On the other hand, if you think that you may be more likely to invoke the clause, then you want a State law that is more liberal in its interpretation.

How Upadhye Tang LLP Can Help

As our supplier/seller clients know, penalties for breach of contract and failure to supply can be quite steep. At Upadhye Tang LLP, we will analyze supplier contracts and relevant clauses to determine if creative arguments can be made to excuse or delay performance.

On the other hand, if clients need performance from a supplier who is failing to perform, we will see if contract law can be used to force performance. Our experienced attorneys will also thoroughly review the clause and the entire contract to see if an affected party can claim indemnification from the non-performing party.

Furthermore, our legal team is editing contracts for our pharmaceutical and medical device clients to ensure that they include supply chain shortages, FDA enforcement actions that block imports into the US, and contain language such as pandemic, epidemic, viral/bacterial/contagion outbreaks, and unforeseen events.

If you are concerned about the validity of a contract due to Covid-19, it is in your best interest to consult with us immediately.

Contact Upadhye Tang LLP Today

If you are unsure of your contractual obligations during this pandemic, the skilled legal team at Upadhye Tang LLP can help. Our highly knowledgeable and experienced attorneys have extensive experience with contract analyses and enforcement.

Shashank Upadhye

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