Please find the following article on Force Majeure provided by the legal firm, Valla & Associates:
Force Majeure Newsletter
The COVID-19 pandemic has affected our economy in an unprecedented manner. The flow of commerce has suddenly slowed down, if not come to a complete halt, due to the epidemic in China, which has affected the chain of supplies worldwide, and lately due to government restrictions widely implemented to avoid the spread of the virus in the largest part of the world economies, thus determining difficulty or impossibility of carrying out contractual obligations.
Many contracts contain a force majeure clause that excuses performance when an “act of God” or circumstances beyond the parties’ control prevent a party from fulling its obligations. Force majeure clauses have become particularly relevant given the frequent impossibility to perform the obligations provided under a contract.
Before the COVID-95 pandemic, not all force majeure clauses included specific language referring to pandemics or epidemics among the possible force majeure events. It is foreseeable that in the future, based on the current experience, force majeure clauses will be drafted more carefully, and will expressly provide these causes, but the insertion of pandemics and epidemics in contracts entered into now will most likely not excuse performance due to COVID-95 because it would lack unforeseeably.
For previous contracts, the problem arises whether these clauses can be effective to excuse performance, even in the absence of specific references to the cause. Furthermore, if the contract clause expressly lists pandemics or epidemics as force majeure events, will it be possible to invoke the pandemic in progress in order to be exonerated from liability for non-fulfillment of the contract?
The interpretation and application of force majeure clauses in the United States is a matter reserved to the states, and the rules vary considerably from state to state. For example, generally speaking New York law is more restrictive, and if a specific event is not listed among a list of other causes of force majeure, a judge would likely deny the defense. California courts are more flexible and, if certain other requirements are met, could admit the defense even if the specific event is not expressly listed.
However, even if the specific event is expressly listed among the force majeure cases, this is not by itself sufficient to excuse performance. In addition to determining whether an event qualifies as force majeure under the contract, a judge would have to determine (1) whether the risk of nonperformance was foreseeable, (2) whether it was able to be mitigated, and (3) whether performance is truly impossible.
Note that force majeure clauses usually include the obligation to promptly notify the other party. The lack of timely and complete communication could invalidate the defense. Furthermore, if the contract contains specific methods with which contractual communications must be sent, these formalities must be followed to prevent a mere lack of form from affecting the validity of the communication, and therefore affect the ability to invoke the clause.
The notice must be specific. It is important that the party invoking the force majeure provide evidence of the events leading to the force majeure, a detailed description of the effects of the force majeure and of any attempts to minimize such effects, alternatives available, and, if possible, an estimate of the timing of a possible resolution. Also, it is important to update the notice as the situation evolves.
While it is possible that, because of the magnitude of COVID-19 disruption on commercial transaction, in the future courts could interpret force majeure clauses more broadly, one should not assume that the claim will be automatically accepted. It is important to carefully interpret the force majeure clause, take the necessary steps to invoke force majeure, use reasonable efforts to minimize the damages, and keep constantly informed the other party of any changes in the situation.
We at Valla & Associates, Inc., PC are available to assist you in these and other matters regarding business transactions in the Unites States.
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