The Impact of Force Majeure Clauses in Agreements During the COVID-19 Crisis
The difficulty in fulfilling contract obligations due to the many problematic aspects of the COVID-19 crisis, calls for the legal review and consideration of the “force majeure” clauses in a contract.
A force majeure clause is a contract provision contained in most commercial contracts that excuses a party’s performance of its obligations under the contract when certain circumstances arise beyond the party’s control, making performance inadvisable, commercially impracticable, illegal, or impossible. Force majeure clauses typically provide a list of extreme events that can excuse a party’s performance under the contract. These contract provisions can vary in the list of events excusing default, overall performance or delay in performance.
Prior to the current crisis, force majeure clauses were largely considered to be provisions that were unlikely to be triggered in an agreement. The standard language for a force majeure clause in a contract can vary, but usually involves potential events such as war, terrorist attacks, strikes, famine, fire, and the all-encompassing “acts of God” language. Other commonly included force majeure provisions in contracts are epidemics or pandemics. Little did legal practitioners realize that New Jersey, the Northeast region, the rest of the country and virtually the entire world, would actually encounter a pandemic or epidemic involving the COVID-19 crisis in 2020.
Contractors, subcontractors, owners, suppliers, businesses and individuals should evaluate whether the “COVID-19 epidemic" is expressly covered as a force majeure event.
In the context of COVID-19, a force majeure clause should be reviewed to understand the following: (a) the purpose of the clause; (b) the particulars of the clause; (c) the importance of notice; and (d) the ramifications of the clause.
In order to invoke the force majeure clause and to obtain relief from your obligations under a contract, you must also be able to show that the particular event is a direct cause of your company’s inability to perform its contractual obligations. Your contract should be reviewed to examine whether a force majeure clause exists and, if so, whether the COVID-19 pandemic and the related governmental actions fall within the list of events included in the force majeure clause.
If the force majeure clause includes the terms “pandemic”, “epidemic”, “disease” or possibly “acts of God”, or “governmental action,” it is likely that the COVID-19 pandemic and related government actions to respond to the pandemic is a force majeure event under the force majeure clause.
- A party seeking to invoke a force majeure clause in extending or excusing its performance, must give timely notice to the other party. It is extremely important to provide timely notice to the other party in your contract if you are using COVID-19 as the reason to suspend performance or for non-performance under a force majeure clause. The failure to give timely notice may result in a waiver of your right to obtain relief for non-performance or delayed performance under a contract.
- You should be aware that many force majeure clauses have a “carve-out” for payment obligations, meaning the force majeure clause cannot always be used to excuse a party’s breach of its payment obligations under the contract. You must consider your liability before invoking a force majeure clause, as it could provide the other party with a right to terminate that contract due to your breach.
- Governmental actions that have been taken and supply chain problems may strengthen your company’s position if you claim that a force majeure event has occurred. Please note that force majeure is temporary and only applies for the period of time that the force majeure event occurs and restricts a party’s performance under the contract.
- You may be well served to contact the other party to the contract to communicate expeditiously to explore solutions to resolve any issue that you might be having to comply with the contract, especially if you may not be able to successfully invoke a force majeure clause.
It is important to note that paragraph 11 of Governor Murphy’s Executive Order 107 issued on March 21, 2020 references that “examples of employees who need to be physically present at their work site in order to perform their duties” includes construction workers. This exemption from the stay-at-home order must be considered by owners, contractors and sub-contractors during this crisis, when evaluating a force majeure clause claim.
A force majeure provision in your contract should be carefully evaluated to consider the impact of a force majeure event, such as COVID-19 or a governmental business shut- down order, on your contractual obligations. It is also important for the facts and circumstances of a particular contract and project to be evaluated within that context. Because force majeure clauses vary, the language must be scrutinized to determine if the force majeure clause in your contract can be used to excuse nonperformance or to delay performance.
- We advise that you obtain legal advice before invoking a force majeure clause regarding a contract during this crisis.
If your contract has a force majeure clause and if you or your company is having difficulty in performing your or its contractual obligations, the clause should be reviewed by an attorney to determine if it can provide relief for you or your company. Lawyers and parties are now assessing contracts which have been affected by the COVID-19 crisis to ascertain the ability of a company or individual to comply with their obligations under the contract.
We are able to review such clauses and contracts for you. Therefore, please feel free to reach out to either Richard R. Ahsler at rahsler@newjerseylaw.net, or Jeffrey B. Lehrer at jlehrer@newjerseylaw.net, or at 908-757-7800, for an analysis of the impact of COVID- 19 as a possible force majeure event on your business, contracts and projects.
