The rapid spread of COVID-19, and increasingly stringent government orders regulating the movement and gathering of people issued in response, has raised concerns about parties’ ability to comply with contractual terms across a variety of industries. The most common term addressing parties’ obligations under such circumstances is a force majeure clause, which is often (but not always) included in commercial contracts. Such clauses generally set forth limited circumstances under which a party may terminate or fail to perform without liability due to the occurrence of an unforeseen event. Assessing applicability and enforceability of such clauses requires a highly fact-specific analysis.[1]
To assist clients in identifying issues they should evaluate in connection with their contractual obligations in the face of the pandemic, we have prepared a 4-Step Checklist and Flowchart to review and assess force majeure clauses.
STEP 1: Does COVID-19 trigger the force majeure clause? The first step is to review the triggering events enumerated in the force majeure clause.
Many force majeure clauses are triggered by an “act of God,” but do not specifically enumerate public health events.[2] If the force majeure clause covers only “acts of God,” the current pandemic may be outside its scope. If your force majeure clause specifically references an “epidemic,” “pandemic,” “disease outbreak,” or even “public health crisis,” the current situation relating to COVID-19 may fit within that clause. Where a force majeure clause does not explicitly reference disease or public health, it may still include a reference to government action as a force majeure event, including, “acts of civil or military authority,” “acts, regulations, or laws of any government,” or “government order or regulation.” Where such clauses are present, recently adopted regulations and executive orders regulating, among other things, the size of gatherings or mandating the closure of certain establishments may qualify as force majeure events.
Many force majeure clauses also contain catch-all provisions (e.g., “any other cause whatsoever beyond the control of the respective party”) that may appear to cover any unforeseen event. However, courts generally interpret force majeure clauses narrowly and typically do not interpret a general catch-all provision to cover externalities unlike those specifically enumerated in the balance of the clause.[3] Where a contract contains a broad force majeure clause that does not enumerate any examples, but generally refers to events outside the performing party’s control, it may cover the current pandemic. If litigated, however, a party may have to prove that the clause, when drafted, was intended to cover a similar situation (a public health crisis as opposed to a natural disaster). A party may also be required to demonstrate that the event that triggered the force majeure provision was beyond its reasonable control and without its fault or negligence and that it made efforts to perform its contractual duties despite the occurrence of the event.[4] Some force majeure clauses also specify that they only apply for the length of the event triggering the clause—in those instances, a party claiming relief under the force majeure clause may have the burden of demonstrating that it was actually prevented from performing for the length of time claimed.[5]
STEP 2: What is the standard of performance? The second step is to review what specifically the force majeure clause excuses.
Force majeure clauses may codify an impossibility standard and require that performance of contractual obligations be “impossible” before all obligations are excused. Others may be less stringent, requiring only that the performance, in light of the triggering event, would be “inadvisable” or “commercially impractical,” or may provide for relief only “to the extent that” performance is impaired. For example, if the applicable jurisdiction has adopted a ban on gatherings of more than 50 people through April 15, 2020, but the contract relates to an event in late April, the force majeure clause may not allow termination if it relies solely on an “impossibility” standard of performance but may cover a termination if the relevant performance standard is “inadvisable.” Finally, not all force majeure clauses provide for termination of an agreement; some only excuse delayed performance, providing that any failure to perform due to a triggering event will not constitute a breach under the relevant agreement.
STEP 3: When must notice be given? The third step is to review the contractual requirements, if any, for notice.
Force majeure clauses may require either (i) a minimum amount of notice ahead of an event contemplated by the contract, or (ii) notice within a certain number of days of the triggering event. Failure to provide timely notice may prohibit a party from obtaining the benefit of a force majeure clause in the agreement even when a triggering event is covered by the contract’s force majeure clause.[6] For example, a new government regulation (e.g., shrinking the maximum size of permitted gatherings from 500 to 50) may be a force majeure event under the particular language of an agreement and may start the clock on the notice period even though your event may be in the future.
STEP 4: Are there requirements for the form of notice? The fourth step is to review whether the contract requires a specific form of notice.
Notice provisions may specify the form of the notice, to whom it must be sent, and the manner in which it must be sent. Additionally, many agreements will require that notices given thereunder must provide sufficient specificity to make clear why the relevant triggering event applies to a given provision in a contract. Given the current work-from-home orders, it may be difficult to comply with all formal notice requirements in a contract, and clients may wish to propose alternative methods of providing notice with contract counterparties for so long as the current climate persists. Gibson Dunn may also be able to assist clients with mailings—either notices required to be given or responses to notices received—especially where the client does not have an operational mailroom.
| Does the force majeure clause require performance of obligations to be “impossible” before contractual obligations are excused? | No ☐ | Yes ☐ | If yes, the force majeure clause may have been triggered if the current government regulations specifically prohibit the fulfillment of contractual obligations. Proceed to Step 3. | |
| Does the force majeure clause require only that performance would be “inadvisable” or “commercially impractical”? | No ☐ | Yes ☐ | If yes, the force majeure clause may have been triggered due to the extreme disruptions caused by COVID-19. Proceed to Step 3. |