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The COVID-19 crisis and the governmental response to the situation have occurred at an alarming pace. The impacts are being felt on a personal, corporate and business level. In the context of contractual obligations people are looking for solutions and some are turning to Force Majeure.
What is Force Majeure?
Literally translated, Force Majeure means Superior Force. In the common law system, Force Majeure is not an independent legal doctrine or rule. It is shorthand used to describe a type of contractual provision dealing with what the parties intend to happen if one or both of the parties are unable to meet contractual obligations as a result of certain events beyond the parties’ control.
Not all contracts will have a Force Majeure clause and some contracts will have a clause for the same purpose but not reference Force Majeure. It is very important to consider each situation and the particular contract involved. There are general considerations and important things to be aware of but parties are at liberty to allocate risk and provide for outcomes in whichever way they bargain to do so.
Does COVID-19 trigger my Contract’s Force Majeure provision?
The definition of a triggering event is determined by the wording of the contract at issue. Often contracts will have a list of triggering events expressly set out. Some contracts will have a general statement about events that render performance of the contract impossible. More complex Force Majeure clauses will also exclude certain events or classes of events, which will not be considered Force Majeure.
Some contracts expressly list events like disease, pandemic or quarantine. In other instances there may be analogous or broadly worded events like disaster or government order. The current circumstances exemplify the importance of considering how the parties want to deal with situations that would prevent the completion of the contract and whether certain events should be expressly included or excluded.
What are the consequences of using Force Majeure?
Many more comprehensive Force Majeure clauses will delineate the process for invoking Force Majeure including notice requirements, deadlines, and how the use of the Force Majeure provisions will impact the completion of the Contract. A Force Majeure clause may require strict deadlines and notice requirements. It is important to refer to the contract to ensure that all requirements are met in order to invoke the benefits of Force Majeure.
When invoking the Force Majeure clause the results will vary depending on the wording of the contract. The delay caused by the Force Majeure event is often addressed in the contractual provisions. Delay to a Force Majeure event may extend the contract by a corresponding amount of time. There may be relief from an obligation to pay for services that could not be completed on time and often payment for partial performance is required. The consequences of invoking a Force Majeure clause depend directly upon the working of the contract, this point is repeated but not overstated given the number of ways that contracting parties have addressed the Force Majeure situation.
What happens if my contract does not have a Force Majeure clause?
The legal doctrine of Frustration operates to discharge contracting parties from their obligations under a contract. The case law has developed to create a high threshold to establish frustration of a contract. This is not unexpected given the extraordinary result being a release from contractual obligations bargained for. At law Frustration of a contract has been described as taking place when the performance of a contract is radically different than what the parties had intended. Notably, the economics of a transaction are excluded from these considerations. A Court will not typically consider a contract that is much more expensive than the parties initially expected, to be frustrated.
The standard example of Frustration of Contract is where the subject matter of a purchase and sale is destroyed. In that example the result is permanent and it is more obvious that the parties should be released from the contract. A quarantine or pandemic situation like COVID-19 presents unique challenges when considering the application of Frustration. Lawyers and the Courts will need to consider unique aspects of COVID-19 such as its duration, the response by government, and how quickly society is responding to the pandemic, among many other aspects, when dealing with arguments about whether contracts have been frustrated.
A Force Majeure clause allows parties to a contract to negotiate and consider what happens to the contract in the event of a situation as extreme as COVID-19. Frustration of Contract is ultimately left to a judge to apply the principle of law based on many different cases. A Force Majeure clause is interpreted and applied based on the wording by the parties in their contract. Consider your current contracts and how COVID-19 will impact them; and consider revisiting the Force Majeure clause in your future contracts to ensure they reflect the parties’ true intentions when the worst occurs.
To receive a recording of our April 1 webinar on Force Majeure in the era of COVID-19, email email@example.com.