COVID-19, Force Majeure and the Impossibility of Performance

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In managing the volatility and uncer- are interpreted narrowly and often are HOT TOPIC tainty caused by the COVID-19 pandem- difficult to invoke. ic, industries have continued to grapple COVID-19, Force Majeure with complex legal and commercial Courts generally assess the follow- and the Impossibility of challenges, from manufacturing shut- ing criteria when assessing a party’s Performance: US and UK downs, interrupted supply chains and reliance on force majeure: (i) whether Perspectives quarantines, to dislocated labor markets the event is force majeure under the and restrictions on trade and movement, contract; (ii) whether nonperformance including the practical shutdown, or was foreseeable and could be mitigated; and (iii) whether performance is Tom Canning near shutdown, of substantial portions Partner impossible. Courts narrowly apply force [email protected] of the world economy. +44 20.7615.3047 majeure to the events enumerated in the contract. Force majeure clauses Moreover, governments have inter- Jacqueline Chan often list the specific events (e.g., Partner vened to provide liquidity and emer- [email protected] floods, fires, and earthquakes) and/ gency relief to credit markets and +65 6428.2433 or categories of events (e.g., natural vulnerable industries and to preserve William Charles disasters, terrorism, and government Partner actions) that can potentially excuse [email protected] performance under the contract. +44 20.7615.3076

Aled Davies Force majeure seeks Even if the event giving rise to nonper- Partner formance is within the scope of the [email protected] to protect parties to +81 3.5410.2851 force majeure clause, a party generally must also demonstrate that (i) the Allan Marks a contract from being Partner event was unforeseeable, and nonper- [email protected] held to performance formance could not be mitigated, and +1 424.386.4376 (ii) performance is impossible, not obligations which, Daniel Perry simply economically challenging. Partner [email protected] due to events outside +1 212.530.5083 FORCE MAJEURE CLAUSES of their own control Jed Schwartz As with all contractual disputes, courts Partner and expectation, they generally begin their analysis of force [email protected] majeure clauses by looking at the terms +1 212.530.5283 cannot fulfill. of the agreement and the intent of the Nicholas Smith drafting parties. Courts construe force Partner [email protected] majeure clauses narrowly and will gener- +1 202.835.7522 payrolls. Nonetheless, pandemic-in- ally only excuse a party’s nonperfor- duced economic uncertainty has led mance if the event that caused the party’s Justen Fleming Special Counsel many companies, lenders and inves- nonperformance is specifically enumer- [email protected] tors to seek guidance on their rights ated. When an event is not specifically +81 3.5410.2852 with respect to contractual obliga- enumerated in the force majeure clause, Brenton Culpepper tions, especially in the key area of force but there is a general catchall provision in Associate the clause, the catchall provision is “not to [email protected] majeure provisions. +1 212.530.5626 be given expansive meaning.” Instead, it FORCE MAJEURE IN THE UNITED is “confined to those things of the same Dan Hooks kind or nature as the particular matters Associate STATES [email protected] mentioned.” Generally, courts also require +1 212.530.5541 The concept of force majeure seeks to that the event must be unforeseeable. protect parties to a contract from being Vasiliki Katsarou Associate held to performance obligations which, Even if an event in question fits within [email protected] due to events outside of their own the delineated events that could poten- +44 20.7615.3282 control and expectation, they cannot tially excuse performance under the Joseph Richmond fulfill. An assessment of a party’s force majeure clause, the nonperforming Associate right to invoke a force majeure clause [email protected] party still must establish that the event +65 6428.2578 requires a review of the contract at in question actually prevented, hindered issue. However, force majeure clauses and/or delayed its performance under

Milbank.com© 2020 Milbank LLP. To be added to our mailing list, contact us at: [email protected] Winter 2020 | ProjectsPlus is an information source for clients of Milbank LLP. Its contents should not be construed as legal advice and readers should not act upon the information in this publication without consulting counsel. the contract. Force majeure clauses be given expansive meaning.” Instead, factors or financial hardships gener- often contain provisions requiring it is “confined to those things of the ally do not constitute force majeure parties to exercise reasonable diligence same kind or nature as the particu- events that excuse performance under to avoid or overcome the force majeure lar matters mentioned.” For example, a contract. However, the specific terms event and its consequences, failing a force majeure clause listing floods, of the contract at issue and jurisdic- which performance will not be excused fires, and earthquakes likely would not tion governing their interpretation may under the force majeure clause. But include COVID-19 because disease and provide a basis for considering economic even in the absence of such provisions, government action are not expressly hardship when exercising force majeure. New York courts appear to still require listed. However, a force majeure clause parties to make such a showing. Other listing natural disasters, terrorism, and OVERCOMING A FORESEEABILITY jurisdictions, including Texas, have held government actions may include the REQUIREMENT IN POST-COVID-19 that such a showing need only be made government action taken to contain CONTRACTS when expressly required by the force COVID-19, but likely would not include A party exercising a force majeure claim majeure clause. COVID-19 itself. generally must establish that the event giving rise to nonperformance was CONTRACTS WITHOUT A FORCE COVID-19 AND THE SCOPE OF unforeseeable, depending on jurisdic- MAJEURE CLAUSE FORCE MAJEURE tion. If COVID-19 is the event giving rise Whether COVID-19 or the governmen- Courts are likely to refuse a party’s to nonperformance, a party likely will tal actions taken to contain COVID-19 force majeure claim if the underly- face difficulty in excusing performance are within the scope of a force majeure ing contract does not include a force pursuant to a force majeure clause if clause depends on whether those majeure clause. In such a circumstance, the contract was executed after the events are listed or are of the same a party may look to common law tools World Health Organization declared type of events listed in the clause. to excuse nonperformance, such as the COVID-19 a pandemic because COVID- Courts construe force majeure clauses doctrines of impossibility and, where 19 would be deemed a foreseeable narrowly and will generally only excuse available, impracticability. risk. On the other hand, because the a party’s nonperformance if the event COVID-19 situation has continually that caused the party’s nonperfor- ECONOMIC HARDSHIP AND FORCE changed over the course of the year, as mance is specifically enumerated. When MAJEURE has the response of different national, an event is not specifically enumerated Economic hardship does not generally state, and local governments, a party in the force majeure clause, but there provide enough basis to exercise force may be able to argue that the partic- is a general catch-all provision in the majeure. Absent express contractual ular consequence of these responses clause, the catch-all provision is “not to provisions to the contrary, economic was not foreseeable.

Milbank.com© 2020 Milbank LLP. To be added to our mailing list, contact us at: [email protected] Winter 2020 | ProjectsPlus is an information source for clients of Milbank LLP. Its contents should not be construed as legal advice and readers should not act upon the information in this publication without consulting counsel. “epidemic” are frequently listed as one perform an obligation under its of the specific events or circumstanc- contract (the affected contract) es that may constitute force majeure because its supplier is claiming (as long as the general requirements of force majeure due to the outbreak. the force majeure provision are satis- In this case, the affected party fied), or the COVID-19 outbreak may will need to show that the suppli- be caught by a more general term such er’s claim for force majeure meets as “act of God,” or simply as an event the standards under the affected or circumstance beyond the affected contract, and that the affected party’s reasonable control. contract expressly allows a force majeure claim when the affected Although this list of events or circum- party’s performance is impacted stances is neither exhaustive nor by a force majeure event some- conclusive, it should be noted that where else along the supply chain. the principle of ejusdem generis often This is often referred to as ‘chain operates to narrow construction of force majeure.’ such a clause when a party is trying to argue that an additional, unlisted event It is worth noting in this regard that the falls within the definition. English courts have held that a failure of performance due to the provision of FORCE MAJEURE IN THE UNITED MAKING A FORCE MAJEURE CLAIM insufficient fin ancial res ources, or los s KINGDOM of market due to the event, is unlikely To make its claim, the affected party The concept of force majeure, a civil to amount to force majeure. Accord- would need to establish that the law derived term, has no universal- ingly, a change in economic/market outbreak is contemplated as a force ly applicable meaning under English circumstances due to the outbreak majeure event as an “epidemic” or an law. Rather, it is to be assessed on a affecting the profitability of a contract “act of God” or, if relevant, that the contract by contract basis, applying or the ease with which the parties’ obli- restrictions placed upon companies normal principles of contractual inter- gations can be performed, is perhaps pretation/construction. and citizens by a government in order to unlikely to be regarded as being a force help contain the outbreak, are contem- majeure event. A customary force majeure clause in plated by the force majeure definition a contract will provide contractual as “governmental action.” To read more about force majeure and relief to a party affected by an event the COVID-19 pandemic from the US or circumstance which: (i) is beyond Some issues that may be encountered law perspective click here, and from the the reasonable control of the affect- are: English law perspective click here. ed party; (ii) is not the result of any • (i) whether the outbreak could act, omission or delay of the affected have been reasonably foreseen party; (iii) could not have been reason- given the precedents for other ably foreseen, avoided, or reduced by major epidemics impacting global the exercise of reasonable measures; supplies, including the unrelated and (iv) causes or results in that party SARS outbreak in 2003; not being able to perform its obli- • (ii) where the affected party may gations (other than the obligation not have been directly impacted by to pay money) under the contract. the outbreak but rather impacted The contract will also typically have a by the subsequent governmental non-exhaustive list of events or circumstances that would constitute a force action to contain the outbreak. In majeure event (provided that the above this case, the affected party would general conditions are satisfied) such have to show that governmental as acts of nature (sometimes referred action (for which the contractual to as acts of God, such as earthquakes, relief may differ relative to an act tsunami and epidemics), acts of man of God force majeure) constitutes a (such as war, industrial action, piracy, force majeure event; riot and sabotage) and governmental • and (iii) where the affectedparty action (such as change in law, regula- is not directly affected by the tions and expropriation). “Disease” or outbreak but yet is unable to