By Casey T. Miyashiro
ct*@ha**********.com
No, the Pope did not proclaim “Force Majeure!” to call for the temporary suspension of all contracts because of the coronavirus; rather, force majeure is a secular concept in contract law. Force majeure refers to a clause or provision that allows a party to be temporarily or permanently excused from performance due to events beyond that party’s control. The unprecedented rapid spread of the coronavirus and the government’s response has led to a re-evaluation of this obscure and oft forgotten concept in contracts as it may offer businesses and individuals relief from their contractual obligations as they struggle to navigate these uncertain waters. This article will cover several important key points to consider when evaluating whether your contract may allow you to declare force majeure, as well as stress the value of consulting an attorney before taking any action.
As with all contracts, the first step is to review the language of the contract. Find the force majeure clause, which is typically its own paragraph labeled “Force Majeure.” If you cannot find one, contact an attorney to review the contract for you – 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:
- Does the coronavirus qualify 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. Typically, this includes catastrophes such as “war,” “Acts of God,” and “disruption of the labor force,” and sometimes “pandemic” and “public health emergency.” You must be able to show that the coronavirus, or the response to it, matches at least one of the listed qualifying force majeure events.
- Does the coronavirus actually prevent me from performing the agreement? The coronavirus 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 or impossibility of performance and the accounting firm will not be able to declare force majeure to avoid performing its obligations under the contract. Ultimately, this analysis is fact-intensive and will likely require the assistance of a lawyer.
- Delay or Termination? Most force majeure clauses merely permit a delay in performance until the force majeure event has concluded. Sometimes, if the delay continues for a specified length of time, the contract automatically allows the other party to terminate the contract. You should be aware of the consequences and other rights that the other party may gain if you declare force majeure.
- What degree of interference is required before performance is excused? Force majeure clauses differ as to the degree of interference that a force majeure event must cause before a party’s performance can be excused. Some clauses state that performance must be “impossible.” Others 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.
- What are the notice requirements? Have I missed them? As in most contracts, failing to provide timely notice may result in a waiver of rights. Accordingly, there may be deadlines to provide notice of force majeure. Read the contract to determine what form of notice is required and which event starts the clock for providing timely notice. For the coronavirus, it could be the day the World Health Organization (“WHO”) declared this a pandemic, the day a Governor ordered non-essential workers to stay home, or both, depending on the force majeure event (compare “pandemic” and “disruption of the labor force”). Again, this is a fact-intensive inquiry that will likely require the assistance of a lawyer.
- What are the consequences of declaring force majeure? 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. There may also be long-term consequences: business relationships and reputations may be tarnished and the other party may initiate costly and timely litigation. Before declaring force majeure, you may want to negotiate with the other party to see if alternative or reduced performance will be acceptable. The other party may be willing to work with you and offer concessions. Generally, you should declare force majeure only as a drastic, last-step measure.
These questions are generally applicable to all contracts, including landlord-tenant contracts. Landlord-tenant contracts specify the rights and obligations between the parties such as rent, the landlord’s duty to deliver the leased space to the tenant, and, for commercial contracts, the tenant’s obligation to operate continuously. Landlords and tenants alike should review their contracts to determine their rights and obligations during this coronavirus situation. They should also check whether the Federal or State government has passed legislation or issued orders that offer relief or protection without having to declare force majeure. Again, it is probably best to consider other steps before declaring force majeure, while being mindful of any notice requirements.
If you are the party who is receiving a force majeure declaration, the same principles discussed above apply. You should read the contract; determine whether the coronavirus actually qualifies as a force majeure event; determine which obligations may be excused; determine if proper, timely notice has been given; and weigh the consequences of allowing the other party to declare force majeure.
As stated frequently in this article, interpreting force majeure clauses usually requires a nuanced, fact-intensive analysis that often necessitates the assistance of a legal professional. Lawyers have developed the skills necessary to read and interpret contracts, and can offer suggestions as to the potential ramifications of declaring force majeure.
For more information on this issue, or if you are considering declaring force majeure, please contact Casey T. Miyashiro at ct*@ha**********.com.
