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updated: 4/16/2020 8:43 AM

Undestanding force majeure in the COVID-19 crisis

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  • Natasha Adler

    Natasha Adler

 

Coronavirus (COVID-19) is a major topic today. In addition to having a tragic effect on the health of the world's population, the virus, and the safety measures implemented in response to it, are having a negative effect on international business. Globally manufacturers and suppliers are scrambling to identify contractual relief as supply chains crumble. The reason behind this ranges from worker shortages and closures of manufacturing plants, to transportation bans and mandatory quarantines.

Understanding your obligations and the related provisions within your contracts is essential for determining how COVID-19 will affect your company. This is where the often-overlooked force majeure clauses become important. These clauses identify those circumstances or events beyond the parties' control, the occurrence of which makes performance under the contract impossible or impracticable, and either operate to excuse performance or extend the time to perform.

While majeure event provisions are not standardized in the United States, such provisions often use the phrases "acts of God" or "acts of Governmental Entities," in addition to listing other possible delaying events such as war, famines, and strikes. It is not often that these provisions explicitly refer to epidemics and/or quarantine.

To determine if a force majeure event has occurred, one must analyze the event using the terms of the contract. To start, you must first determine what events constitute force majeure under the contract. These events will either be generally or specifically identified in the contract.

Should you determine that a qualifying event has occurred, you must then determine whether the provision completely relieve a party (you or the other side) of their obligation to perform or does the provision merely delay or suspend performance until the force majeure event has been resolved or is concluded. It is important to note that most force majeure clauses do not address adjustments in contract price.

The next step requires you to determine if you are the only one required to take steps to mitigate the risk of any potential losses as a result of the force majeure event or if the other party under the contract is required to take steps to mitigate the potential losses as well.

The last part of the analysis, related to notice, is often overlooked and can cause major issues when overlooked. It is extremely important to determine the type of notice required to be given and when such notice is required. Certain provisions even require that regular updates be given and if such are not, the protections granted by the clause end.

In the event that your company is impacted by COVID-19, the following tips will help you manage the situation.

1) Identify the issues and document them. Your ability to identify the facts on which you based your decisions may be crucial for subsequent legal proceedings. It is essential that you fully identify the issues and the underlying facts and then properly document such.

2) Review your contracts and governing law to see how risk is allocated. As stated above, force majeure provisions differ from contract to contract, and from state to state, so you must analyze each of your contracts separately.

3) Keep everyone properly informed. Often a force majeure clause, or governing law, will require that you give prompt notice of a force majeure event; if you fail to do so, you will not be able to use it as defense.

4) Try to overcome the supply problems. Many contracts, and several states, exclude a force majeure event if you can overcome the force majeure event. You must consider other potential sourcing options and/or transportation means which would allow you to satisfy your obligations under the contract.

5) Be careful how you allocate existing supplies. Problems can arise if you choose to supply your priority customers and then give the rest force majeure declarations.

6) Manage disputes proactively. It is important to communicate and engage with your customers and suppliers in a cooperative and reasonable manner; doing so will help to avoid escalating disputes and may resolves matter quicker.

To keep informed, and avoid misinformation, business owners should visit the official Center for Disease Control (CDC) and World Health Organization websites at CDC Coronavirus website and WHO Coronavirus website.

• Natasha Adler is an attorney at law with Waltz, Palmer & Dawson, LLC in Rolling Meadows