#Weareinthistogether #Arewe?

In the days leading to the publication of this legal alert, Illinois Governor J.B. Pritzker, New York Governor Andrew Cuomo, Los Angeles Mayor Eric Garcetti, D.C. Mayor Muriel Bowser, and other state and local leaders ordered bars and restaurants closed for on-site consumption. San Francisco Mayor London Breed ordered her city to shelter in place, countless school systems shuttered for at least two weeks, and the Supreme Court postponed oral arguments until at least April. 

 

By the time this legal alert is actually published we may have seen further actions here in the USA and certainly across the globe in an effort to slow the transmission of the novel coronavirus outbreak. As we see the proliferation of #socialdistancing, #flattenthecurve, #quarantinelife and #weareinthistogether, our thoughts turn to our clients and their businesses that will be immediately challenged by these shifting sands and we may wonder, #arewe? 

 

In this legal alert we briefly discuss the anatomy of force majeure clauses; consider at a high level whether or not, based on a force majeure clause alone, a vendor (or customer for that matter) may be excused from performance under a contract; and contemplate if #weareallyinthistogether or if failure to fulfill orders, violations of service-level covenants and other coronavirus outbreak-caused breaches will result in mass terminations of contracts or litigation around force majeure. 

 

Please note, the following legal alert is meant to focus on general principles only. Each force majeure clause has its own unique language (and each commercial contract has its own nuances) and many states have unique force majeure jurisprudence that should be carefully considered before invoking any force majeure clause. 

 

 

A “force majeure event” is generally described in a business transaction as an extreme event beyond the control of the obligor, that may prevent the obligor from performing the contract. Typically speaking, in the United States, if a contract is silent on whether or not something qualifies as a force majeure event, a court would look to the foreseeability of the event that the obligor has claimed was a force majeure. To put a fine point on the principle, a supplier of shrimp located on the Florida Coast may have a difficult time convincing a court that a major hurricane was unforeseeable and that even though that major hurricane made it impossible for the supplier to meet its supply obligations it should be excused from performance under its supply contracts. There are also common law defenses to contract performance, including frustration of purpose and impossibility, but the applicability of these defenses is complicated and uncertain. To reduce uncertainty as to what qualifies as a force majeure event under a commercial contract and to allocate risk, parties generally negotiate force majeure clauses to govern what happens in extreme circumstances. 

 

A typical, relatively well-drafted, force majeure clause has four components: (1) a definition of what qualifies as a force majeure event; (2) language that excuses performance; (3) notice requirements; and (4) a statement of the effect of a force majeure event on the contract. 

 

The definition of what is a force majeure event will more often than not have a broad statement about what is, or is not, a force majeure event– a circumstance or cause beyond a party’s reasonable control, not caused by such party (sometimes limited by foreseeability)– and then a non-exhaustive list of particular events that qualify as force majeure events. This list may include acts of God, flood, fire, earthquake, severe weather event, explosion, epidemic, pandemic, quarantine, war, invasion, hostilities, terrorist threats or acts, riot, national or regional emergencies, acts of a governmental or regulatory body, embargoes, labor shortages, labor stoppages or slowdowns or other industrial disturbances, or outages or shortages of adequate power supply, telecommunications, internet, supplies, raw materials, fuel, infrastructure or transportation.  

 

The clause will go on to specify when (if at all) a vendor will be excused from performing the contract (or a particular obligation under the contract). Some vendor-friendly clauses will provide that if a party’s performance is not just prevented, but hindered or delayed as a result of a force majeure event, it will be excused from performance. Generally, there needs to be a direct nexus between the force majeure event and the failure to perform. 

 

In addition to identifying what is a force majeure event and when (and to what extent) a vendor is excused from performance, a force majeure clause will require the obligor who cannot meet its obligations to provide a notice of the force majeure event and a description of that nexus between the force majeure event and the failure to perform. 

 

Finally, a typical force majeure provision will provide the length of time that performance is excused and whether or not the continuation of a force majeure event for a particular amount of time may result in the termination of the agreement or the ability of the customer to seek other remedies. 

 

 

Whether or not an obligor may be excused from performance under a contract pursuant to a force majeure provision will require careful reading of that contract’s particular force majeure language and consideration of that obligor’s particular circumstances. If we consider the coronavirus pandemic in particular, there is a decent chance that the pandemic (or a related supply-chain slow down, labor shortage, etc.)- if not now but at some point- will satisfy many definitions of a force majeure event. 

 

But, has the obligor created the connection between the force majeure event and the ability to perform under the contract? For example, if an obligor has a service-level requirement that requires it to process and scan a certain number of pieces of mail each day and it failed on multiple occasions within the last year to meet that service level, and in fact was in breach of that service level when the force majeure event occurred, can that obligor successfully invoke the force majeure event and be excused from performance? That is, can that obligor fairly claim that it was only the force majeure event that caused its failure to meet its Service-Level Agreement (SLA)? Alternatively, what if before the coronavirus outbreak the obligor had not been failing to make its service-level requirements, but then out of an abundance of caution, told half of its workers to stay home, thus resulting in a failure to meet the SLA. Has the obligor satisfied the requirement to create a link between the pandemic and the failure to meet the SLA? 

 

Finally, what if the government has told all businesses to shut down? Is the obligor excused? Whether or not the obligor is excused from performance under any of these examples, even the third example, which looks like a model for what should be a force majeure event, is highly dependent on the language of the contract and the particular facts and circumstances of the business. For a provision that is supposed to allocate risk and bring clarity, things may not be so clear. 

 

 

As this legal alert hopefully has made clear, before a company decides to invoke its force majeure clauses it should proceed thoughtfully and with caution. Carefully consider why you are trying to invoke the clause- is this really a result of the coronavirus outbreak? Are you experiencing a force majeure event under the four corners of your contract? Can you really make a solid argument around that very important link between the force majeure event and the cause of the failure to perform? Even if you can create that link, does your force majeure provision give the customer a termination right or other remedies if the force majeure event continues? Or does your customer possibly have a right to terminate the contract without cause or reason, independent of a force majeure event? These considerations may be particularly important if your customer can find an alternative supplier.

 

In addition to carefully considering your force majeure clauses, we would urge all of our clients to give thought to other rights they may have under their commercial agreements. If you have a flat breach, what is your cure right? Is there a cure period or a reasonableness component? If you are in breach of your SLAs, are the cure rights and remedies different from those of another material breach? For example, can you miss an SLA three consecutive months before there is a termination right? Is there an escalation process that must occur before termination? Is the cure limited to service credits? Do you have a termination right beyond a force majeure event? Do you have the right to terminate your contract because of a change in law or government order? Do you have the right to terminate your contract without cause or reason? There may be other creative ways to come to the table with your customers.  

 

As we all try to come to grips with the effects of the coronavirus outbreak on our businesses and relationships, the question will become, are we all in this together? Can suppliers and customers find a way through this difficult time through cooperation and perhaps some renegotiation of contract terms? Or, will we see contracts terminated and substantial litigation on the applicability (and reach) of force majeure clauses for those who choose to invoke them. Although the laws of the states of Delaware and New York- the law many commercial parties elect to apply to their contracts- have strong principles of enforcing the language of a contract as written, it is possible that strong public policy considerations in favor of containing infectious disease will favor those parties truly acting in good faith toward that goal. However, speculation that the judiciary will take a new-found liberal view toward force majeure clauses in the wake of the novel coronavirus is just that- speculation. 

 

While only time will tell whether #weareallyinthistogether, Eversheds Sutherland stands ready to assist clients with difficult questions such as these during these challenging times. 

 

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