As COVID-19 (or the Coronavirus) continues to disrupt the worldwide economy, private equity professionals are facing issues about whether the current events can excuse performance of the commercial contracts that impact their portfolio companies, as either buyers or sellers of goods and services. Indeed, as COVID-19 continues to disrupt the global supply chain, portfolio companies and other businesses are faced with the growing prospect of being unable to meet their contractual obligations. These unforeseen events may fall within the scope of so-called “force majeure” clauses contained in commercial agreements and could potentially excuse or partially excuse a party’s nonperformance.
A “force majeure” clause is often included in commercial contracts to limit damages resulting from nonperformance or delay when an unforeseen event occurs that was beyond the reasonable control of the parties. Typically, force majeure clauses are triggered when certain contractually defined events, such as an act of God, occur. Parties who cannot or who are reluctant to perform their contracts may attempt to invoke these force majeure clauses in order to excuse nonperformance.
However, force majeure clauses and their applicability are specific to each contract and are narrowly construed.1 The rules governing the applicability of force majeure clauses may also vary by jurisdiction, particularly with cross-border contracts. Whether COVID-19 constitutes a force majeure event will depend on the specific terms of the contract and the reason for invoking it. To determine whether COVID-19 constitutes a force majeure event excusing nonperformance, parties should consider:
- What Events Are Specifically Covered By the Clause: Courts will examine whether the event is specifically defined in the force majeure clause to determine its applicability.2 Certain force majeure clauses specifically include “pandemics” or “epidemics” as a force majeure event. However, in many instances, the applicability of the clause will likely be less clear. For example, force majeure clauses may include government regulations and orders as force majeure events, which could encompass government mandated closures of certain businesses during the outbreak. The industry in which a specific company operates could also impact whether a force majeure is triggered by government regulations and/or orders. For example, a portfolio company operating in the transportation space may be able to claim a force majeure event resulting from government regulations more easily than companies in other less-impacted industries.
- Whether the Event Caused the Nonperformance: The occurrence of a force majeure event in and of itself will not excuse nonperformance. Courts also often require proof that the nonperformance was actually a result of the claimed force majeure event.3 Parties may seek to invoke a force majeure clause simply because it is triggered by COVID-19 or its resulting impacts. However, unless COVID-19 or its impact is actually responsible for the nonperformance, courts will be reluctant to excuse that nonperformance under a force majeure clause.
- Whether Performance Is Truly Impossible: Certain courts require performance to be truly impossible and/or impracticable, not just difficult, in order to invoke a force majeure clause.4 On the one hand, a party would likely be able to assert that performance would be impossible if a government restriction relating to COVID-19 would make the performance of the contract illegal. On the other hand, a party may have more difficulty invoking a force majeure clause if the party simply claims that it cannot perform due to financial considerations.5 However, the specific terms of the contract may waive the impossibility requirement, and it is important to remember that different jurisdictions may reach different results on this issue.
- Notice: Force majeure clauses also typically contain explicit notice requirements. For example, a force majeure clause may require a party to notify the other party of a force majeure event within a defined period of time. Likewise, a party may need to identify the force majeure event with a reasonable amount of detail. Also, a party may need to identify the length of time that the party expects the event to continue. Parties should be cognizant of these notice provisions when asserting or receiving a claimed force majeure event.
In short, whether a force majeure clause is triggered and applicable will be highly specific based on the terms of the parties’ contract and what controlling law applies. As a result, it is imperative to consult with sophisticated counsel when either you or your contractual counterparty seeks to invoke such a clause to discontinue performance.
To read more about COVID-19 click here.
¹Reade v. Stoneybrook Realty, LLC, 63 A.D.3d 433, 434 8 (N.Y. App. Div. 1st Dep’t 2009).
²Kel. Kim Corp. v. Cent. Mkts., Inc., 70 N.Y. 2d 900, 902 (N.Y. 1987).
³Watson Laboratories, Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099 (C.D. Cal. 2001).
⁴See, e.g., In re Cablevision Consumer Litig., 864 F.Supp. 2d 258, 264 (E.D.N.Y. 2012); Facto v. Pantagis, 390 N.J. Super. 227, 231 (2007).
⁵Macallay Corp. v. Metallurg, Inc., 284 A.D. 227 (N.Y. App. Div. 1st Dep’t. 2001).
The views expressed herein are solely the views of the authors and do not represent the views of Brown Rudnick LLP, those parties represented by the authors, or those parties represented by Brown Rudnick LLP. Specific legal advice depends on the facts of each situation and may vary from situation to situation. Information contained in this article is not intended to constitute legal advice by the authors or the lawyers at Brown Rudnick LLP, and it does not establish a lawyer-client relationship.