COVID-19 And The (Legal) Ripple Effects Of ‘Force Majeure’

The rise, and spread, of COVID-19 has had a global impact, where the human toll has been significant, the economic cost unquantifiable and at this point, perhaps, unfathomable.

And where business relationships, based on contracts, are concerned, legal (and financial) liabilities tied to disruption, to cancellations, to a grinding halt of everyday life are perhaps murky at this point. And what about the contracts themselves? They may spell things out, but where the pandemic is concerned, they might not.

The “Act of God” or “Force Majeure” clauses that cover a range of events — floods and earthquakes, for example — are designed to help insulate firms from the shock of the unforeseen. The literal translation of the French term comes to “superior force,” and this case, in grappling with the vagaries of the coronavirus, it seems we are indeed facing, for the moment, a force to be reckoned with, where the legal liabilities have yet to be illuminated.

In an interview with PYMNTS, Jeffrey Neuburger, partner at Proskauer Rose LLP and co-head of the law firm’s Technology, Media and Telecommunications group, said that much depends on the fine print.

Various studies have looked at the mounting toll of the health crisis. Dun & Bradstreet estimated last month that at least 51,000 companies globally had seen the impact on suppliers; RapidRatings said this week that only three in 10 companies globally (and particularly in Italy, China, South Korea and Japan) could expect to be fully operational amid the pandemic.

A subset particularly hard hit, as noted by RapidRatings, includes smaller firms, with revenues in the $10 million to $100 million range, with 76 percent unable to operate at full capacity.

All of this translates into a loss of production, stockouts, shortages of critical supplies, and full-fledged disruptions up and down supply chains.

In the scrambling to address the fallout from COVID-19, many firms may be unclear as to what contracts cover — whether there’s an escape clause, in other words — and what they do not.

“A lot of people do not focus on the force majeure clauses when they are negotiating contracts,” Neuburger told PYMNTS, “and so many people do not know what is in the force majeure clause or what it says.”

The reality, he said, is that in situations facing the business world, such as with a pandemic, courts may look to the specific wording of the clause, and depending on the states in which that law applies, may interpret that language strictly.

Asked which verticals might be most impacted as the virus spread, he said that “I don’t think there’s any industry that isn’t thinking about force majeure in this circumstance.” He pointed to supply chain concerns as being front and center, along with transportation, hospitality and financial services verticals.

But: It’s not always clear just what does constitute a force majeure (and thus, of course, the fine print matters).  Asked by PYMNTS whether firms might point to the pandemic as making it simply impossible to fulfill their contractual obligations, he said that “impossibility” is actually a higher standard — such as when a factory might be shut down by order of authority, and cannot manufacture goods to ship.

Force majeure, he said, is a doctrine that states a party is prevented from performing — and depending on contractual language, that may be due to impractical or difficult circumstances.

The ripple effects in a force majeure situation, said Neuburger, can be significant when it comes to supply chains.

As he said, each party is reliant on the performance of the firm “before” them that makes goods and ships them.

Force majeure, he said, “impairs the ability of the subsequent parties to perform.”

If Party A is impaired, Party B may have a force majeure argument, as would Party C — all the way down through the chain to the sale of finished products. The force majeure clauses may allow for delays up to a certain amount of time, after which a firm can terminate a contract.

PYMNTS noted that some contracts might allow for companies to pivot from traditionally exclusive supplier relationships toward alternative suppliers in the event of force majeure — to which Neuburger said: “This already a fairly common provision. And in supply chain-related contracts, people who don’t have that provision and are experiencing a problem now will probably have that provision in the future.”

On The Other Side

On the other side of the COVID-19, it’s likely we’ll see force majeure clauses include terminology related to epidemics and pandemics.

Amid worries about legal battles and efforts to be made “whole” after delays, stockouts and equipment shortages, Neuburger told PYMNTS: “I think this is a situation where we are all in it together, in a way. Nobody really wants to litigate if they can avoid it.” Though there may indeed be disputes tied to contract provisions, and some cases where significant liabilities are incurred, Neuburger predicted that “I think you’ll see a lot of these situations get worked out through negotiations.”