COVID-19 and Force Majeure Clauses
Posted March 23, 2020
With the unprecedented level of business closures over the last week throughout New Jersey, New York and Pennsylvania resulting from the spread of COVID-19, many companies are facing innumerable challenges in revenue cycles and supply chains. Because these rapid and –in some cases devastating—changes are occurring as a result of world events that are outside of the control of businesses, force majeure provisions should be analyzed in all existing contracts.
A force majeure clause in a contract “provides a means by which the parties may anticipate in advance a condition that will make performance” of that contract “impracticable” or impossible. If an “unforeseen event,” that impacts performance of a contract occurs, courts may give such a provision a reasonable interpretation based upon the circumstances at the time. Examples of events that are often listed as triggering a force majeure event include labor and material shortages, strikes, wars, terrorist attacks, government orders and acts of God. While the rapid spread of a communicable virus such as COVID-19 may not be specified in every force majeure clause, courts have interpreted “acts of God” to extend “not just to natural events such as storms but to ‘comprehend all misfortunes and accidents arising from inevitable necessity which human prudence could not foresee or prevent.’ ” Consequently, businesses that are faced with contracts that are impossible to perform as a result of COVID-19 may be excused from performance based upon a force majeure clause.
Businesses that have contracts that include no force majeure clause may also have protection. New Jersey Courts and others have held that force majeure principles may be invoked by companies by asserting the defense of impracticability or impossibility. In short, a party to a contract may defend their breach of a contract by proving the unavailability of a certain thing – i.e., a healthy workforce – simply makes performance of the contract impracticable or impossible.
Businesses that are facing challenges performing contracts or those businesses that have partners who may be at risk of breach should have counsel perform a detailed review of existing force majeure provisions. There may also be circumstances that justify a business forced to consider breaching a contract to affirmatively invoke the defense of impossibility. It is important to understand what options parties to a contract may have in this rapidly-changing commercial environment.
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