In these unprecedented days, you read a lot about force majeure and “act of God” defenses to commercial contract publications. Companies affected by the current pandemic are looking to contract terms to minimize their financial losses as the pandemic forces closures and cancellations, and productivity drops off in many industries.
This post addresses a small but important subset of those contracts: “contracts” with governmental agencies, such as consent decrees or consent judgments (Orders) entered into before the pandemic that contain specific obligations or specific deadlines, as well as stipulated damages clauses if those deadlines are not met.
It is important to note that the Orders often include force majeure protections that let parties off the hook for obligations that go unfulfilled due to “acts of God” and other events beyond their control. However, lawyers must review the Orders carefully to determine what’s covered and what’s not.
- What Is force majeure, and how is it used?
Force majeure clauses excuse the responsible party to an Order from meeting certain obligations when events beyond its control interfere with its ability to meet the obligations in the Order. If successfully invoked, the clauses can relieve companies from commitments – temporarily or permanently – without being in breach of their agreement.
- Does the pandemic qualify?
Whether the pandemic qualifies as a force majeure depends on the wording – and the governmental agencies entering into the Order. In recent days, we have reported on the U.S. Environmental Protection Agency’s issuance of a new temporary enforcement discretion memo (link to blog post) which in effect acknowledges the applicability of force majeure provisions in certain instances. States have done so as well. Shellie Chard, director of the Oklahoma Department of Environmental Quality’s water quality division, called the EPA’s guidance a “reasonable response.” The Texas Department of Environmental Quality likewise has established a process for companies to notify them of potential noncompliance due to the Covid-19 epidemic and seek discretionary waiver of enforcement. Washington State’s Department of Ecology says it will still respond to spills and enforce environmental protection laws, but it recognizes that entities could struggle to comply with state law as they combat the virus. Yet other states have underscored that certain obligations are still in effect. Rolling back enforcement “is a shameful exploitation of the current public health crisis,” said Basil Seggos, commissioner of New York’s Department of Environmental Conservation. Similarly, the Maryland Department of the Environment said that it will only grant exemptions on a “limited, case-by-case, locally tailored basis.” This patchwork of inconsistent application of force majeure concepts to obligations with governmental entities means that each Order or obligation has to be reviewed expressly in light of current regulations, wording of the Order itself, and case law.
- Is it easy to invoke force majeure?
There’s more to it than saying the magic words “coronavirus” or “act of God.”
Contract interpretation is often governed by state law. Speaking of case law, force majeure clauses in commercial contracts are typically interpreted narrowly under U.S. law, meaning that force majeure clauses with explicit language about epidemics will have the most success avoiding their obligations without penalty. In Orders, however, there is not the same freedom of negotiation for terms. Many governmental authorities have preapproved “form” Orders where preset language is difficult if not impossible to amend. This “contract of adhesion” quality to the Order may give rise to a broader interpretation of language in Orders than in commercial disputes and can serve as an argument to interpret the Covid-19 pandemic as a category of force majeure or act of God event.
- What are responsible parties doing so far?
Proactive, responsible parties under Orders are taking a look at each of their Orders and preparing an analysis now of what obligations are or could be affected by the pandemic and whether these obligations are candidates for waiver via force majeure. They are working closely with counsel to develop the necessary documents and evidence to put their company in the best position to use the force majeure clause as a shield for governmental enforcement.