Let’s say your construction contract calls for delivery of a product made in China, but the plant is shut down because of Covid 19. Can you or your supplier say, “so sad too bad?”
Read your Contract does it have a Force Majeure Clause?
These so called “Acts of God” provisions, may address natural disasters such as Covid 19, as well as terrorism, wars etc. Please read the entire contract, this language can be located anywhere in the contract. That language will control the parties’ obligations. What if there is no Act of God clause? In certain situations, if the purpose of the contract is totally frustrated by Covid 19 or some other Act of God, you may still get relief. But a close analysis of all circumstances must be made. Certain narrow circumstances may allow performance to be excused when it would be impossible or impracticable to perform, or the core purpose of the contract has been frustrated, due to unexpected events. Don’t throw in the towel. As you might imagine absent a Force Majeure Clause, the common law remedy is not nearly as clear or easy to enforce as a clear well written force majeure clause.
Determining Whether The Coronavirus Pandemic Is A Force Majeure Event?
Determining rights, obligations, and potential remedies under a contract with or without a force majeure clause typically requires a complex analysis of the contract language, the governing law, and the totality of the situation. Because of the novelty of this virus there is no guarantee this virus qualifies as a force majeure “event.” My bet is it may well qualify. The laws of most U.S. states require force majeure clauses to be interpreted narrowly—events that do not appear to have been within the contemplation of the contracting parties may not be viewed as force majeure events. For example, if the particular clause mentions only unusual weather and man-made disruptions, you may have a loser. Clauses that include “acts of government” or “state of emergency,” may provide an excuse for performance. For example, the Federal Government recently shut down a huge amount of Federal construction. Continuing work might violate the express government directive. See FAR regulations below. Suspending work, might be the viable option. As you can see the specifics of the situation will have to be assessed to determine whether a strong argument can be made that a force majeure event has occurred.
Taking Actions Necessary To Excuse Performance
If your force majeure clause is reasonably interpreted to include the coronavirus pandemic as a triggering event, the next step is to determine whether actions must be taken to excuse performance, or whether actions must be taken to avoid losing certain remedies.
Always Give Timely Notice and Mitigate Damages. Check for Business Interruption Insurance
Your contract may contain a clause requiring that notice be provided within a specific number of days after occurrence of the triggering event. Failing to provide the required notice could prevent reliance on the force majeure clause to excuse nonperformance if a claim of breach is filed. There also is an obligation to mitigate damages. A good faith attempt to either perform or to take other steps to achieve the contract’s goal is almost always required. You should review all your insurance policies for business interruption coverage, coverage for losses resulting from actions by government “civil authority,” or other cause. Always consider renegotiation on terms that are reasonable given the situation. Going forward, make sure all your future contracts have force majeure clauses specifically including communicable disease outbreaks, endemics, and pandemics, and clear terms addressing the parties’ rights and obligations, and applicable procedures after a triggering event.
“Epidemic” Is an Excusable Delay On Federal Contracts
Lastly, if you are a Federal contractor doing business with the United States of America, the Federal Acquisition Regulation (“FAR”) §52.240-14 provides that a “Contractor shall not be in default because of any failure to perform its contract under its terms if the failure arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of these causes are epidemics, quarantine restrictions etc. In each instance, the failure to perform must be “beyond the control and without the fault or negligence of the Contractor.” The coronavirus pandemic fits squarely within FAR §52.240-14. See also FAR §52.240-10. Make sure you give notice to the government and make efforts to mitigate damages and document problems.