Summary: If COVID has left you unable to perform under a contract, using the age-old force majeure clause may be helpful when negotiating with the other party. Note: this article is not legal advice, but general information.
People and clients alike are hesitant to read contracts—and for good reason. Upon first glance, a contract appears to be a formidable foe. The reader peruses over the terms and conditions, all lined up in neat rows, and decides to retreat. The pages appear to never end. To add insult to injury, certain provisions have legal names and terms, making understanding even harder.
Even attorneys and business people are reluctant to read deep into contracts.
This article will not attempt to teach you how to fully understand each aspect of a contract. But, this article will address how to possibly adjust your contract in light of the recent pandemic, for purposes of contractual negotiation. COVID-19 has re-introduced the age-old contract concept of force majeure—an obscure legal term that may allow those under contract relief from their contractual obligations.
This article will cover 6 key steps to consider when evaluating whether your contract allows you to declare force majeure.
FORCE MAJEURE IN A NUTSHELL
Simply put, force majeure is a contract’s clause or provision that allows a party to be temporarily or permanently excused from performance due to events beyond that party’s control.
For example, suppose there is a business agreement between a local doctor’s office and a copier company. If the agreement between both parties contains a force majeure clause, the doctor’s office may be allowed to stop payment to the copier company if an event listed under the clause arises.
The parties’ performance under this Agreement is subject to acts of God, war, government regulation, terrorism, disaster, strikes (except those involving [a party’s] employees or agents), civil disorder, curtailment of transportation facilities, or any other emergency beyond the parties’ control, making it inadvisable, illegal, or impossible to perform their obligations under this Agreement. Either party may cancel this Agreement for any one or more of such reasons upon written notice to the other.
SEARCHING FOR FORCE MAJEURE IN CONTRACTS
Does COVID change your contract? To answer that question, the first step is to review the language of your contract. Find the force majeure clause, which is typically its own paragraph, labeled “Force Majeure.”
Of course, these force majeure clauses can be written in different ways. If you cannot find one, it may be hidden in other sections, or written in complex legal language. If there is one, read the entire force majeure clause, and ask yourself the following questions:
STEP 1: DETERMINE WHETHER COVID QUALIFIES AS A FORCE MAJEURE EVENT
Force majeure clauses are selective: only the events explicitly listed in the clause can qualify as a force majeure event. Events like “war,” “Acts of God,” “disruption of the labor force,” and sometimes “pandemic” and “public health emergency” count as force majeure events.
If your contract lists “pandemic” as an event, then COVID likely qualifies under the contract. The next step would be to determine what happens in the event of force majeure, and how both you and the other party is affected.
If “pandemic is not within the agreement, and COVID does not fall within one of the listed events, you must be able to show that COVID, or the consequences of it, qualifies under the list.
STEP 2: DETERMINE IF COVID PREVENTS YOU FROM PERFORMING UNDER YOUR AGREEMENT
COVID must actually be the reason that you or your business cannot perform.
Take, for example, a large accounting firm that agreed before the coronavirus to provide accounting services to a business. The government’s response to the coronavirus is to require people to work from home. Assuming the firm has set up remote computer connections and all of the business’s files are online, the healthy accountants would still be able to perform accounting services to the business from their home. Thus, the coronavirus does not actually cause a delay and the accounting firm will not be able to use force majeure to avoid performing its obligations under the contract.
Ultimately, determining whether COVID applies to your contract depends on the situation you find yourself in.
STEP 3: DECIDE WHETHER TO TERMINATE OR DELAY YOUR PERFORMANCE UNDER THE CONTRACT
Most force majeure clauses merely permit a delay in performance until the force majeure event has concluded. If your contract contains this clause, it would allow you to re-negotiate with the other party. If that applies to your contract, this negotiation could be the bargaining that helps you during these harsh times.
Sometimes, if the delay continues for a specified length of time, the contract automatically allows the other party to terminate the contract. But, automatic termination must be specified in the contract.
You should familiarize yourself with the other party’s rights if you declare force majeure under the contract.
STEP 4: DETERMINE WHAT DEGREE OF INTERFERENCE IS NEEDED BEFORE YOU ARE EXCUSED UNDER THE CONTRACT
A force majeure event must cause before a party’s performance can be excused. Some clauses state that performance must be “impossible.”
Other clauses use a lesser standard, allowing a party to be excused where performance is merely “hindered” or “impracticable.” Depending on the standard, a party may not be excused just because performance has become more difficult or costly.
It is important for you to read what level of interference is required to be excused under your contract.
STEP 5: DETERMINE WHAT THE NOTICE REQUIREMENTS ARE
In most contracts, failing to provide timely notice may result in a waiver of rights, which would disallow a party from claiming force majeure. There may be deadlines to provide notice of force majeure to the other party.
Read the contract to determine what form of notice is required and which event starts the clock for providing timely notice. Does notice need to be written? Can it be verbal? Is there a specific person that needs to be notified by the other party?
For COVID, it could be the day the World Health Organization declared this a pandemic, or the day Governor Doug Duecy ordered non-essential workers in Arizona to stay home.
The bottom line: know the exact specifics of the notice required, and what happens if you fail to follow these requirements. Negotiation talks could depend on these notice requirements.
STEP 6: DETERMINE WHAT THE POTENTIAL CONSEQUENCES ARE IF YOU DECLARE FORCE MAJEURE WITH THE OTHER PARTY
Before declaring force majeure, you should consider all potential consequences. As mentioned above, declaring force majeure may allow the other party to terminate the contract. Additionally, business relationships and reputations may be harmed between the parties.
Before declaring force majeure, you may want to negotiate with the other party to see if you can give either give a different performance from what the contract requires of you. The other party may want to work with you on your request.
This article was meant to give helpful tips for those who merely wish to renegotiate with the other party as a way to avoid litigation. Generally, employing force majeure clauses as a defense in court should only be a drastic, last-step measure, when there are no more negotiations to be had.
If your contract does not contain force majeure clauses, there may be other legal defenses to assert that may allow you to exit your contract. In the coming weeks, we will reveal what possible defenses you may be able to use.
Business, force majeure, or contract questions? Call Chuck at (480) 545 – 0700.
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