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Posted by Chrissy Hammond on Mon, Apr 20, 2020 @ 05:17 PM

force majeure covid

The COVID-19 pandemic has caused organizations to experience disruptions to their normal course of business – mandatory remote work, business closures, travel restrictions and breakdowns in the supply chain. The issues caused by the pandemic have raised an important question for many businesses: Does COVID-19 qualify as a “force majeure” event for purposes of business contracts?

What Is Force Majeure?

The term “force majeure” is French for “superior force.” Force majeure clauses are common business-related contractual provisions. They provide for a suspension or cancellation of a company’s performance of obligations under the contract should an extraordinary event occur that is beyond the control of either party. Force majeure generally describes such uncontrollable events that are not the fault of either party and that make it extremely difficult, or impossible, to carry out normal business (e.g., war or extreme weather).

Does COVID-19 Qualify as a Force Majeure Event?

 

The short answer to this question is it depends. Whether the pandemic is considered a force majeure event will depend on three factors:

  1. The language of the individual contract – Many contracts include language that will specify examples of covered force majeure events, for instance, a hurricane or outbreak of war. Unfortunately, many force majeure provisions remain ambiguous, failing to directly address the specific situations in which the force majeure provision would be triggered. Pay attention to notice provisions and check to see if your contract’s force majeure clause includes language specific to “pandemics,” “epidemics,” “illness” or “disease.”
  2. Jurisdiction – States vary in their interpretation and enforcement of force majeure clauses.
  3. Facts of the case – How has COVID-19 affected the parties’ businesses and their ability to fulfill their obligations at the time the triggering event occurred? This is a fact-based analysis that will vary in almost every instance. 

There is no one-size-fits-all response to the question of whether COVID-19 qualifies as a force majeure event. The answer in each situation must be determined by considering the facts at hand. For this reason, businesses may need to audit their existing contracts to determine whether COVID-19 will affect either party’s ability to fulfill their obligations under the agreement. After conducting an audit, businesses may need to consult with legal counsel as to the enforcement and performance of their obligations under the existing contracts.

Tips for Employers Analyzing Force Majeure Clauses

Of course, the primary concern of all employers should be the health and welfare of their employees and customers. Employers should stay informed and follow the advice of federal, state and local health officials. However, businesses must also assess the practical impacts of the pandemic on their operations.

In those instances when you are prevented from performing your end of the contract, employers analyzing force majeure clauses should consider the following:

  1. Document the specifics of your business interruption. What actually prevents you from performing the contract. This may be required to defend your invocation of a force majeure clause.
  2. Consider modifying future contract language to include specific circumstances, such as pandemics, when adding the clause is in your favor.
  3. Review your current insurance coverage to determine whether your policies contain coverage that might be available in a force majeure situation. Seek the removal of exclusions in your insurance program that adversely affect you in force majeure situations.

Additionally, regardless of whether a contract includes a force majeure clause, companies might find success in simply contacting customers, suppliers and employees directly to explain and discuss delays or other issues. You may determine that you can alter your agreement to allow for future performance by agreeing on modified terms. A clear line of communication can ensure everyone is on the same page, and the individuals and companies involved typically appreciate a proactive approach during a particularly tumultuous period. If you have any questions, please contact us.

Looking for more COVID-19 resources? Visit our resource center for expertise on impacts to expect and how your business can respond.

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Copyright © 2020 CBIZ & MHM (Mayer Hoffman McCann P.C.). All rights reserved. CBIZ and MHM are separate and independent legal entities that work together to serve clients. CBIZ is a leading provider of tax and consulting services. MHM is an independent CPA firm providing audit and other attest services. This article is protected by U.S. and international copyright laws and treaties. Use of the material contained herein without the express written consent of the firms is prohibited by law. Material contained in this alert is informational and promotional in nature and not intended to be specific financial, tax or consulting advice. Readers are advised to seek professional consultation regarding circumstances affecting their business.

Tags: COVID19, Coronavirus, Force Majeure

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