From time immemorial, buyers and sellers have strived to address the impact of what Donald Rumsfeld famously termed \u201cknown unknowns\u201d on their contractual relationships.\u00a0 Last December, a pneumonia outbreak in Wuhan, China was unknown to the world. \u00a0Traced to a novel strain of the coronavirus, \u201cCOVID-19\u201d has spread to more than 75,000 people in over two dozen countries, causing 2,000 deaths.\u00a0 China has responded with a quarantine of unprecedented scale and proportion, which has significantly affected the movement of people and resources within the country.\u00a0 These travel restrictions have already had a direct impact on Chinese manufacturing, which relies on large numbers of semi-skilled labors travelling from inland provinces to factories in Wuhan and other affected areas and working in close quarters. \u00a0Economists are now openly discussing the extent to which COVID-19 will \u201cinfect\u201d the global economy in 2020.<\/p>\n
Previously a known unknown, how well have commercial parties prepared for COVID-19?\u00a0 Parties can agree in advance on what should happen if one side\u2019s performance is delayed by events beyond its control by including a\u00a0force majeure<\/em>\u00a0provision in their contract.\u00a0 Below, we consider how this consensual excuse to performance might play out where COVID-19 has hindered a party\u2019s ability to perform.<\/p>\n \u201cForce majeure\u201d (from the French \u201csuperior force\u201d) is a contractual provision allocating risk if performance becomes impossible or impracticable due to an event that the parties could not have anticipated or controlled.\u00a0 To invoke a force majeure clause and excuse its performance, a non-performing party must establish the following:<\/p>\n Parties are free to define a \u201cforce majeure\u201d to suit their needs.\u00a0 Typically, the seller, as the party with the non-payment obligations, will want a broad force majeure provision that covers a wide range of events.\u00a0 The buyer will want to limit the definition to events that are truly out of the seller\u2019s control and also have the ability to terminate the contract if the force majeure continues for an extended period of time.<\/p>\n U.S. courts do not recognize force majeure as a\u00a0legal doctrine<\/em>.\u00a0 This means that courts will not read a force majeure clause into a contract that does not have one.\u00a0 Consequently, the scope and extent of the force majeure clause is determined by what the parties wrote down in their contract.<\/p>\n A typical force majeure clause might say the following:<\/p>\n The parties\u2019 performance under this Agreement is subject to acts of God, war, government regulation, terrorism, disaster, strikes (except those involving [a party\u2019s] employees or agents), civil disorder, curtailment of transportation facilities, or any other emergency beyond the parties\u2019 control, making it inadvisable, illegal, or impossible to perform their obligations under this Agreement.<\/p>\n This clause is probably not effective against COVID-19 because of the absence of explicit reference to \u201cdiseases,\u201d \u201cepidemics,\u201d or \u201cquarantines.\u201d\u00a0 The antiquated phrase \u201cact of God\u201d will not help the non-performing party.\u00a0 Acts of God are usually limited to planetary events, such as earthquakes, floods, and tornadoes.<\/p>\n What about the catch-all \u201cany other emergency\u201d?\u00a0 The non-performing party might argue that this includes a government-ordered quarantine in response to a disease outbreak like COVID-19.\u00a0 Courts tend to construe catch-all phrases in force majeure clauses narrowly, however.\u00a0 First, a court will often require that the event be unforeseeable at the time of contracting (a \u201cunknown unknown\u201d).\u00a0 Outbreaks of disease are foreseeable, even if their timing is unknown.\u00a0 Second, applying the rule that the specific language controls the more general language, courts often limit the phrase \u201cany other emergency\u201d to refer only to the kinds of events specifically enumerated in the force majeure provision.<\/p>\n Companies that rely on finished products and component parts coming out of China should anticipate some level of disruption from COVID-19.\u00a0 Even domestic businesses might be surprised to learn that a supplier-of-a-supplier-of-a-supplier cannot make a delivery because of the current travel restrictions.\u00a0 Supply chain disruptions like this should have businesses reviewing their contracts with vendors and customers to see whether their performance \u2013 or their counter-party\u2019s performance \u2013 might be excused.<\/p>\n A properly drafted force majeure clause allows the parties to plan for how they will resolve performance issues in the event of known but contingent events, which by their nature are difficult to plan for in advance (the \u201cknown unknowns\u201d).\u00a0 As events like COVID-19 reveal themselves, parties may be inclined to add disease outbreaks and quarantines to an ever-growing definition of \u201cforce majeure.\u201d<\/p>\n It is equally important, however, to address the path forward if a force majeure occurs.\u00a0 In most circumstances instead of permanently excusing performance and ending the relationship, the parties might benefit from flexibility: for example, granting the frustrated party additional time for performance or allowing it to perform at a different rate.<\/p>\n","protected":false},"excerpt":{"rendered":" From time immemorial, buyers and sellers have strived to address the impact of what Donald Rumsfeld famously termed “known unknowns” on their contractual relationships. Last December, a pneumonia outbreak in Wuhan, China was unknown to the world. Traced to a novel strain of the coronavirus, “COVID-19” has spread to more…<\/p>\n","protected":false},"author":1,"featured_media":1496,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false,"_links_to":"","_links_to_target":""},"categories":[332],"tags":[346,322,323,347],"class_list":["post-1534","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-covid-19-resources","tag-contractual-provision","tag-coronavirus","tag-covid-19","tag-force-majeure"],"acf":[],"yoast_head":"\nINVOKING A FORCE MAJEURE CLAUSE<\/h2>\n
\n
ENFORCING A FORCE MAJEURE CLAUSE<\/h2>\n
CONCLUSION<\/h2>\n