Given the current environment, it is crucial to be aware of your contractual rights, potential exposures and legal remedies. This checklist provides some suggestions on best practices for providing notice of force majeure or responding to such a notice.
As recent news articles have made clear, the enforceability of contracts is increasingly in question due to the coronavirus pandemic. In part, this uncertainty is caused by the various shelter-in-place orders that can prevent actual performance of the contract. However, it increasingly appears that some companies may be viewing force majeure provisions as another tool to respond to loss of revenue caused by the pandemic. In short, companies may be invoking force majeure or similar provisions to either delay or avoid monetary expenditures. At a minimum, force majeure provisions are being used in efforts to renegotiate certain contracts. It is crucial, given these developments, that you be aware of your contractual rights, potential exposures and legal remedies.
The extent to which a disruption that impacts performance under the contract and is outside the parties’ control constitutes a qualifying force majeure event is highly fact-specific and depends on the terms of the contract, the specific facts, governinglaw and how courts in the relevant jurisdiction(s) interpret force majeure provisions, among other things. In most instances, in order to excuse a party’s performance in whole or in part, a party will be required to provide written notice of a force majeure event.
The following checklist provides some suggestions on best practices for providing notice of force majeure, including:
1. Review your contract carefully to determine whether the contract includes a force majeure provision, including:
a. The specific events and circumstances that qualify for force majeure treatment;
b. Other relevant terms and conditions in the contract (including governing law, events of default, termination and cancellation terms, materially adverse change clause, dispute resolution, etc.);
c. Analyze whether the performance of any of the parties under the contract will be impracticable, impossible or whether the purpose of the contract is frustrated because of the direct or indirect consequences of a force majeure event or for a different reason.
2. Investigate and document the facts and circumstances leading to your conclusion that there has been a force majeure event.
3. Follow the notice requirements in your contract or under applicable law(s). Some contracts contain detailed procedures and timelines for such notice. Some states require strict compliance with the notice provision in the contract when providing notice of force majeure. Make sure to explain the connection between the specific force majeure event and your inability to perform in whole or in part.
4. If the force majeure provision is silent concerning notice, you nevertheless may want to provide preliminary notice of the possibility of force majeure once it becomes evident that performance may be delayed or rendered impossible. The notice can always be amended or supplemented as additional details become available.
5. Take and document all steps necessary to mitigate or reduce the effects of the force majeure event (including its downstream effects and consequences) on your ability to perform under the relevant contract, including any notifications provided.
6. Consider the potential consequences or downstream impacts of the counterparty potentially suspending its performance under the contract if you notify it of a force majeure event.
7. Assess availability ofinsurance coverage, including business interruption insurance or an event-specific insurance policy.
8. For parties receiving a force majeure notice, carefully review the notice to determine:
a. Whether it falls within the scope of the force majeure provision or applicable law;
b. Whether the form and timing of the notice was proper;
c. The availability and impact of applicable laws and facts, including whether the party claiming force majeure has fulfilled its other obligations under the contract;
d. When and how to respond, whether your performance or payment is excused, whether to terminate the contract in response to the notice and whether to take other actions (e.g., mitigating your damages, notifying third parties, making a claim under an insurance policy, etc.).
9. Parties should always take care before asserting force majeure to avoid a premature claim for breach of contract or anticipatory repudiation. The counterparty may also seek to terminate the contract or avoid its own performance after receiving a notice of a force majeure event. If a legitimate force majeure defense is asserted, the party asserting force majeure will not be liable for breach of contract.