As governments and health authorities institute increasingly strict responses to COVID-19, companies worldwide face unprecedented challenges in meeting their otherwise “business as usual” contractual and regulatory obligations. While these challenges span all areas of business, this post focuses on particular environmental obligations and associated risks.
The U.S. Environmental Protection Agency (EPA) recently instituted a temporary enforcement discretion policy, in keeping with which the agency will not seek penalties for certain violations. As part of this policy, the EPA encourages companies to make use of force majeure provisions in consent decrees and settlement agreements. However, contractual obligations between two private parties are not covered by the EPA policy, leaving companies struggling to find how to: a) utilize a force majeure provision to their advantage; and b) block counter-parties from claiming force majeure against the companies’ business objectives, or mitigate the impact of such claims.
What is force majeure?
The term “force majeure” refers to a legal concept under which a party’s nonperformance under a contract is excused when extraordinary events prevent the party from fulfilling its contractual obligations. An event will likely qualify as force majeure if:
- it constitutes force majeure under the specific terms of the contract;
- the risk of nonperformance due to the event was unforeseeable; and
- performance is truly impossible.
What should you look at when analyzing a force majeure clause?
Whether you’re reviewing a force majeure clause from an offensive or defensive position, there are four things a party should evaluate:
- the specific events constituting force majeure under the contract;
- the standard for invoking the force majeure clause;
- the presence of any catchall provisions; and
- the notice requirements under the clause.
Events constituting force majeure are specific to each individual contract. Common force majeure events include: fires, storms, earthquakes, droughts, floods, wars, rebellions, insurrections, riots, strikes, curtailment of transportation facilities, and acts of terrorism. However, what is and what is not considered force majeure will be listed in the provision.
Many times an “act of God” is confused with a force majeure provision. An act of God often includes natural disasters, wars, and, importantly at the moment, epidemics. The general rule, however, is that an act of God does not relieve the parties of their obligations unless the parties expressly provide otherwise.
When evaluating the standard for invoking a force majeure clause, make sure to identify whether there are unforeseeability or reasonable control requirements. Likewise, look for provisions that may require performance to be impeded to a certain extent, e.g., true impossibility of performance versus “prohibitively difficult” performance. Finally, are there any obligations for a party to avoid the impact of a force majeure event?
Some force majeure clauses will include catchall provisions; however, in many jurisdictions, catchall provisions require unforeseeable events. Specifically, enumerated force majeure events by definition do not need to be unforeseeable, but for a catchall provision to be valid it must be based on unforeseeable events. Courts reason that if an event is foreseeable, parties should protect themselves against it through explicit provisions.
Finally, force majeure clauses have notice requirements for both asserting and responding to claims of force majeure. Typically, a party must give written notice of its intent to rely on a force majeure clause. Force majeure clauses will often require notice either ahead of an event or within a limited number of days after a triggering event. If a party fails to provide timely notice, the contract may provide that the party is unable to assert force majeure protections.
What should you do now?
If you’re trying to assert force majeure due to COVID-19, make sure you’re following the exact provisions of your contract. If your contract does not contain a force majeure clause, then the Uniform Commercial Code may be an alternative avenue to consider. If your contract does contain a force majeure clause, then you should analyze when notice is required. Make sure your company is meeting the required standard to utilize the force majeure provision. If you’re required to take mitigating action before claiming force majeure, then make sure you’ve done it and documented everything you did.
If you’re trying to fight a claim of force majeure, then make sure the contract really does provide for COVID-19 as one of its force majeure events. There has been a decided uptick in contracts written within the last month that specifically cite COVID-19 as a basis for an inability to perform. Make sure the claimant is adhering to the correct standard, and if the counter-party was supposed to take mitigating actions, then make sure they have done everything the contract provision requires of them. Also, make sure to preserve your own rights by following your own response obligations under the force majeure clause.
For other resources on force majeure and the EPA’s temporary enforcement discretion policy, see the following blog posts and client alerts: