The COVID-19 outbreak, now deemed a pandemic by the World Health Organization, is disrupting supply chains globally, leaving many companies unable to perform contracts or supply products to their customers, but is COVID-19 a force majeure that will shield affected companies from liability for non-performance? Under US law, the answer depends primarily on the terms of the companies’ contracts.
Claiming Force Majeure: If your company is unable to supply product or perform its obligations under a contract due to COVID-19, first, check the contract for a force majeure provision.
- If the contract has a force majeure provision:
- If the contract has a force majeure provision, determine whether the COVID-19 pandemic is included in the events defined as a “force majeure.” In particular, look for “epidemic” or “pandemic” in the list of events that constitute a force majeure. Or, if your company cannot perform because a component supplier cannot supply components due to a COVID-19 shut down, look for “inability to obtain components from suppliers” or “suppliers’ failure to supply due to force majeure event” or similar language in the force majeure provision.
- If the contract has a force majeure provision, but does not specifically list “epidemic,” “pandemic,” “inability to obtain components from suppliers” or similar examples, but it does include a catch-all, such as “events beyond the reasonable control of the claiming party,” then you will need to look to the law governing the contract for guidance on whether COVID-19 would be considered a force majeure. Some state laws, such as New York and Delaware law, construe catch-all provisions in force majeure clauses narrowly and may find that force majeure events include only unforeseeable events of a similar kind or nature to those expressly listed in the contractual clause.
- If your contract has a force majeure provision, and your company wants to claim force majeure to shield itself from liability to the other party for delays or failure of performance, you must follow the requirements of the force majeure clause, which may include: (a) promptly notifying the other party of the inability to perform and the force majeure (be sure to follow all notice formalities for notices under the contract); and (b) using commercially reasonable efforts to resume performance as soon as reasonably practical.
- Note that some force majeure provisions will allow the party that receives the force majeure claim to terminate the contract if the force majeure is not resolved within a certain time following the notice of the force majeure. Alternatively, the provision may require the parties to meet and negotiate in good faith appropriate amendments to the contract if the force majeure continues for an extended period.
- If the contract does not have a force majeure provision:
- If the contract does not have a force majeure provision, then look to the governing law of the contract for guidance on common law force majeure claims or frustration of purpose claims. Even if a company cannot claim force majeure, it may be able to claim that its performance of the contract is frustrated by events beyond its control. Again, this is generally a question of state common law, and each state’s laws may vary.
If you receive a force majeure claim: If your company receives a claim from its supplier or another contracting party that such other party cannot perform due to force majeure, the first step, again, is to review your contract.
- Check whether the other party has complied with the force majeure provision:
- Is COVID-19 clearly covered as a force majeure under the language of the provision? If not, DO NOT concede that COVID-19 is a force majeure.
- Has the other party followed the requirements of the force majeure provision, such as providing prompt and adequate notice and attempting to resume performance or mitigate damages? If not, document any failures to comply.
- Ask for Information/Documentation and a plan for resuming performance:
- Even if the force majeure clause does not expressly require it, ask the other party to provide, in writing: (a) detailed information about the cause and scope of the nonperformance, (b) a plan and timeline for resuming performance, and (c) a description of other risk mitigation efforts that the other party will employ.
- If your company and the other party agree on a plan to mitigate the effects of the force majeure, consider whether to include the plan in a formal amendment to the contract, so that your company can claim breach of the amended contract if the other party does not perform in accordance with the agreed plan.
Other Relevant Provisions: In addition to checking force majeure provisions, other provisions of affected contracts should be reviewed closely. Supply contracts, in particular, may have other provisions triggered by the effects of COVID-19 and resulting supply shortages, such as:
- Supply Failure: Buyers and suppliers of goods affected by the COVID-19 pandemic should check their supply agreements for “supply failure” provisions that may trigger a buyer’s right to source products from other suppliers, cancel orders, terminate the agreement or obtain other remedies in the event that the supplier cannot supply.
- Allocation Priority: Supply agreements also may contain provisions that govern the allocation of inventory in the event of a shortage of goods. Such provisions may require the supplier to give certain customers priority or allocate goods on a pro-rata basis among customers.
The effects of COVID-19 are only just beginning to ripple through supply chains and other contractual arrangements. If you need assistance reviewing your contracts or the law to determine your rights, please contact us.
