“Decide to plan, then plan how you will decide,” crisis managers are fond of saying. If your work force is depleted due to the need for employees to stay away from an office or factory vacated due to the COVID-19 (Coronavirus) outbreak, can performance of your contracts with customers be excused by operation of force majeure clauses in those contracts? What could be the business ramifications of invoking this clause?
Crisis management entails planning, and a risk to be considered in that crisis management plan is the failure to meet contract obligations because the work force cannot come to work. The best place to start is a review of the applicable customer agreements with an attorney. Most significantly, look to see if the agreement contains force majeure clauses that could excuse the inability to perform contract obligations – depending upon its text and the law that governs the contract.
Force majeure literally translated means “superior force,” and how it operates depends on the way it was drafted and the law that governs the agreement. Some force majeure provisions excuse performance due to any force beyond a party’s control. Others have specific triggers that can include war, insurrection, flood, fire, terrorism, government regulation and the all-encompassing but perhaps dispute-fertile “Acts of God.” “Epidemic,” “pandemic,” or “disease” are rarely specified. Related to force majeure are the legal concepts of contract interpretation known as “frustration” and “impossibility.” They are similar in concept to force majeure but also require that a force that could not have been foreseen and for which safeguards were not placed in the agreement has prevented performance.
The applicability of these concepts depends on the law that governs the contract, but it is clear that most courts interpret them narrowly and application of them will depend on the facts. Facts in the eyes of the law, even in 2020, are what can be proven and that, in turn, depends on documentation. Crisis planning, then, should include a process for documentation of the work force depletion and the specific reasons for it, efforts made to meet contract obligations, and notification to the counterparty of the force majeure event.
Business considerations should also be in the decisional mix. An agreement may state that it is terminated as a result of a force majeure. But is this best for the business, and who will make that decision? Will declaring a force majeure event affect the ability to obtain insurance reimbursement? Stakeholders, assisted by counsel, should review the applicable insurance policies. And finally, what are the business reputation implications of failing to fulfill the contract?
If you have questions or are seeking guidance in planning for the business implications of COVID-19, please contact Kenneth N. Rashbaum.
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