Will the COVID-19 Pandemic Prompt Use of a Force Majeure Clause in Your Contract?

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If the COVID-19 pandemic is keeping you from performing your contracts, two legal defenses may offer relief until you can perform. One is the force majeure clause, if your contract has one, and the other is a defense called, “impracticability of performance.” They don’t excuse unreasonable behavior, but they can help if the best you can do still isn’t good enough to meet your contractual obligations.

Force majeure clauses are common in commercial contracts. Typically, you will find them toward the end, with all the so-called boilerplate terms. In general, they excuse the parties from performing when circumstances beyond their control intervene, and the specific language matters. They can be broad and general, excusing any breach caused by circumstances beyond the party’s control, or they can be specific and narrow, excusing performance only for limited reasons, like strikes or acts of terrorism. Force majeure clauses can also be anywhere in between. Many actually excuse nonperformance caused by “Acts of God,” leaving it to the courts to decide what that means. Check your contract:

  • Does it contain a clause that excuses performance where the circumstances prevent you from fulfilling your obligations?
  • How specific is the language?
  • Does it cover pandemics, either specifically or with language that is broad enough to do so?

All is not lost if your contract lacks a force majeure clause or other terms that cut you some slack during times like these. The common law of contracts can help if circumstances beyond the parties’ contemplation make it practically impossible for you to honor your obligations. This is not a safety net for every time you find that performing your contract is more expensive or more difficult than you hoped it would be, but it can provide relief when events beyond your control – events the parties all assumed would not occur – make it practically impossible for you to perform. This description seems to fit many businesses these days.

If your contract does lack a force majeure clause, check to see whether it contains language elsewhere that allows you to alter your performance – say, supply less – if you face input shortages or if demand or supply imbalances force you to allocate scarce products.

Remember that judges all know the fable of the “Boy Who Cried Wolf,” and that they usually have some leeway in how they apply these contractual or legal safety nets, so be sure you act reasonably. If you can produce some products, just not enough to fill all of the orders you accepted, develop an allocation plan that is fair and reasonable. There is no one-size-fits-all allocation method, so do your best to develop one based on objective criteria when possible (like forecasts, past purchases or similar factors, keeping in mind that the goal is to be fair under the circumstances).

Keep your customers informed. Even better, solicit their advice and try to use as much of it as possible, and let them know they are important to you and that you are doing everything you can to be fair to them. A judge who believes you did your best is more likely to decide that your force majeure clause is broad enough to include this COVID-19 pandemic, or to apply the common law of impracticability of performance in your favor. More importantly, customers who believe you have done your best to be fair and straight with them will be more likely to accept your best as good enough.

We’re here to help if you have questions; just call any member of the Competition and Commercial Law Team.

Please visit Reinhart’s Coronavirus Resource Center for additional up-to-date information.


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