COVID-19 and Force Majeure

COVID-19 and Force Majeure

FORCE MAJEURE NOW

Austin — March 13, 2020   The COVID-19 virus (the “coronavirus”) is now making an impact closer to home, so many businesses are reviewing their contracts to determine if force majeure declarations provide relief for delayed or interrupted projects and operations. Because force majeure clauses are often tailored to a specific project or supply agreement, the language can vary significantly. As a result, the availability of force majeure relief depends on the terms of the contract, the applicable law, and the circumstances to which they are applied.

The short answer is that the declaration of an emergency or disaster, the imposition of a travel ban, the quarantine of key personnel or shipments, or mandated governmental restrictions on physical gatherings can be force majeure events under many contracts. The overall impact of such a declaration may also depend on contractual risk mitigation (both upstream and downstream) and the declaring party’s actions during the force majeure event.

A. Governing Law & Jurisdiction Will Affect Force Majeure Application
First, the jurisdiction and governing law play an important role in analyzing force majeure applicability. In civil law systems, force majeure is often implied. In common law systems (which most states, including Texas, use) the language of the force majeure clause itself determines applicability.

B. The Express Terms of the Force Majeure Clause Will Impact Its Application
A typical force majeure clause in the United States (or applying the commercial laws of England and Wales) will expressly set out things considered beyond the parties’ reasonable control that are deemed force majeure events, such as unusually adverse weather, acts of the public enemy (terrorism), war, governmental actions, and acts of God. Less often, force majeure may be defined to include things such as labor disputes, strikes, or the inability to obtain specific raw materials. Very rarely, a force majeure clause also refers to a pandemic or epidemic. There is typically a carve-out stating that force majeure events do not include market fluctuations or increased costs.

C. The Context in Which the Force Majeure Clause Applies May Raise Unique Concerns
In addition to the terms of the clause, the context in which it applies may have a significant impact. The three common circumstances likely to pose unique force-majeure concerns are: (1) long-term supply contracts with commercial counter-parties; (2) agreements for the transportation (often shipping), handling and storage of goods; and (3) contracts for the performance of construction or engineering projects.

Supply Contracts.
In the case of a supply contract, particularly where the supply contract’s performance spans years, the force majeure clause is often carefully negotiated, and will frequently:

  • impose mitigation obligations on the declaring party;
  • detail how price adjustments for short-term cover will be reckoned into future business;
  • require proportional curtailment and fulfillment (so that no single party shall be made to unjustly bear a larger percentage of an interruption than any other);
  • extend the contract period for the period of the force majeure event
  • adjust the overall contract for cover during the period of force majeure;
  • oblige the declarant to communicate regularly regarding the progress of mitigating the effects of the force majeure event; and
  • specify a period of time after which either party (or just one) may terminate the contract entirely.

If there is a loophole in the force majeure clauses in a supply contract, it often occurs where a clear force majeure event exists in one place, but not in another location where a related, although separate, contract in the supply chain is to be performed. For example, a Chinese factory is shut down by government mandate following a COVID-19 outbreak. A separate contract down the supply chain is to be performed at the Port of Houston, Texas. The Chinese supplier might properly declare a force majeure event and deprive a trader of a needed supply. The end purchaser in Houston, on the other hand, might be impatiently waiting on the supply, not caring about the exact source of the good. In that scenario, the trader will (hopefully) have protected itself by specifying the source for goods in its contract with the end purchaser, thereby causing the force majeure declaration to pass through to the end purchaser. Alternatively, if no such specification was made, the trader will be required to demonstrate that there is no alternative source for the goods available—a much steeper hill to climb.

Transportation and Storage Contracts.
Force majeure clauses in contracts for transportation and storage have much in common with supply contracts, although the details of the underlying contract, such as where title passes, which party is responsible for insurance, the applicable INCOTERMS, and the availability of alternative means of performance are likely to play a bigger role.

Construction and Engineering Contracts.
“Force majeure” is not a term used in the AIA A201 General Conditions, the contract form widely utilized on commercial projects. However, schedule relief may be found in section 8.3.1 of the A201 General Conditions, which states that, if the Contractor is delayed by “unusual delays in deliveries, unavoidable casualties . . . or other causes beyond the Contractor’s control; . . . . then the Contract Time shall be extended for such reasonable time as the Architect may determine.”

Depending on the facts and circumstances, section 10.4 of the A201 General Conditions, may also provide relief. If not revised, section 10.4 states “In an emergency affecting safety of persons or property, the Contractor shall act, at the Contractor’s discretion, to prevent threatened damage, injury, or loss. Additional compensation or extension of time claimed by Contractor on account of an emergency shall be determined as provided in Article 15 (claims) and Article 7 (Changes).” (emphasis added). “Emergency” is not defined, but local, state, and federal declarations of health emergencies and disasters may qualify if they adversely affect a party’s ability to perform under a contract.

The bottom line is that the performance issues, delays or increased time or cost to perform alone may not be sufficient basis to excuse performance and invoke a force majeure clause. Proceed with caution.

For Contractors, Subcontractors, Owners, and anyone in the construction industry experiencing issues, important steps to consider in these unprecedented times include:

  1. Monitor the situation. Every hour beings new facts and alerts.
  2. Review your contracts with your counsel. Each contract and project is different, so be mindful of notice provisions in your contract regarding force majeure, emergencies or any other impacts on your projects.
  3. Keep detailed records. You need to document the interruption, agreed changes, delays or any causal links between the virus and performance issues.
  4. Review your insurance coverage. Understand whether you carry business
    interruption or other relevant insurances.
  5. Mitigate and explore alternative means to perform. Consider business solutions (rather than legal solutions) such as mutual agreement to change completion dates, renegotiating delivery times or other contractual terms.

D. Your Attorney Can Help You Navigate A Force Majeure Clause
This note is informational only. The facts of each circumstance will determine the best course of conduct. Anyone with specific force majeure and contractual performance questions should immediately contact an experienced business lawyer to set the right course through these difficult times.

For more information please contact Champe Fitzhugh or contributing authors Bill Davidson and Mike Cortez at 713-850-4200

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