With the World Health Organization declaring COVID-19 a pandemic on March 11, 2020, increased focus is on force majeure provisions in contracts. What is force majeure, and is COVID-19 covered under such provisions? What are potential remedies if COVID-19 falls within the definition of a force majeure event in a contract?
TalksOnLaw's Joel Cohen talks with Baker partner José Morán about how and when COVID-19 may qualify as a force majeure event and what common provisions look like. Morán explains the two most common structures, some exclusions that may prohibit a claim, and how courts are likely to interpret the provision.
José Morán is a partner at Baker McKenzie and leads the firm's Energy, Mining & Infrastructure Industry Group.
Baker McKenzie practice alert: Coronavirus Outbreak: Global Guide to Force Majeure and International Commercial Contracts https://www.bakermckenzie.com/en/insight/publications/2020/03/coronavirus-outbreak-global-guide
Joel Cohen: In December of 2019, a new coronavirus was discovered in Wuhan, China. In the weeks and months to follow, it spread around the globe, bringing with it illness and triggering dramatic government responses. Now, with global business disrupted, we'll take a look at if and when COVID-19 triggers a provision known as force majeure or act of god.
Hi, and welcome to TalksOnLaw. I'm Joel Cohen. As we discuss COVID-19 and force majeure, we are joined remotely by Jose Moran, a partner at Baker McKensie, where he leads that firm's energy, infrastructure, and mining industry practice group. Jose, welcome, and before we get started discussing the coronavirus and force majeure, let's get some background on what exactly force majeure means?
Jose Moran: The term "force majeure" also referred to as an act of god address the scenario when performing contract obligations become impossible, difficult, or onerous outside of either party's control.
JC: How would you apply that definition to COVID-19 or the government shutdowns to analysis when it would trigger a force majeure provision?
JM: Generally there are two approaches for contracts. The first approach is to have an open or non-exhaustive list of example events. Force majeure events that we have seen listed that would apply to COVID-19 include: an epidemic or pandemic, government action or intervention, quarantine, and a shortage of labor or materials. If there's one takeaway, it is to add pandemic or epidemic to future force majeure provision.
JC: Now sometimes these lists are open-ended and leave open the possibility for unforeseen events to be included within the force majeure provision. How are courts interpreting that?
JM: Parties must be cautious placing too much reliance on catch-all language or open-lists. New York courts, for example, construe force majeure provisions very narrowly. Under New York law, courts will find an event to be covered by a catch-all only if it's of the same nature and kind as the events that are specifically listed.
JC: You mentioned there are two types of force majeure provisions. We talked about one. What’s the second approach?
JM: The second approach is to have a general objective test, for example: an event beyond control of the parties, an event that could not reasonably have been provided against, or that could not reasonably have been avoided, or an event that is not attributable to either party.
JC: Now, regardless of the type of the type of force majeure provision or the drafting, are there duties or obligations of a party even where the force majeure provision may be triggered?
JM: The affected party cannot generally just sit on its hands. There’s often an obligation on the affected party to mitigate the effects of a force majeure event, for example, sourcing alternative supply or labour even if that is more expensive, or moving personnel to avoid restrictions perhaps between 2 operating projects, plants, or assets. At the very least, there’s an obligation to mitigate, and it will require talking to the other party to the agreement and trying to make alternative arrangements, and perhaps creating an amendment to the agreement, or what is so-called a reopener.
JC: A follow-up question, Jose. Sometimes these force majeure provisions have exceptions or carve-outs. What are you seeing in the market?
JM: There’s almost always a list of exclusions. An obligation to pay money is perhaps the most frequently seen, but matters such as economic hardship, reductions in demand, and shortages of labour are commonly seen particularly in projects in developed countries. These exclusions can be extremely important as they can completely negate valid claims and for existing projects they are not always negotiated as carefully as they should.
JC: And lastly, before we let you go, if the force majeure provision is triggered, what are some of the remedies that the parties may have?
JM: Generally, an excuse against non-performance to the extent that the force majeure event affects performance; the affected party has no liability for non-performance; often, an express right of suspension; and lastly, termination of the contract for prolonged force majeure periods.
JC: Thank you, Jose Moran, for your time. And for those that are watching, remember, this is a global issue, so each individual case will depend on the circumstances of that case, the law governing in that state or country, and the specific drafting of the governing contract. I’m Joel Cohen. Thanks for watching TalksOnLaw.