What you should know about Covid-19 and Force Majeure.

POSTED ON April 16, 2020 / IN FWRV Legal

BY:

Rip Beyman and Eve Nguyen

The ongoing Covid-19 pandemic continues to affect business activity drastically.

In the entertainment space, development, production, and channels of distribution have all been upended.  Studios have ceased production activities. Motion picture theaters, Broadway houses and concert venues have closed until further notice.  Publishers are having difficulty with production and distribution of physical books.

Parties to agreements concerning entertainment projects are now considering whether recent events related to Covid-19 provide legal grounds to suspend a party’s obligations under a contract for a certain period of time or terminate them entirely.  Those obligations might include the exercise of contract options, the duration of rights granted, and the due dates for payments, as examples.

The contract clause that addresses these issues, the so called “act of God” or force majeure clause, is often ignored and rarely negotiated in ordinary times, and is likely to be buried in the boilerplate of an agreement, if it is there at all.

Here are five things you should know about force majeure clauses in the current environment:

  1. Even with a force majeure clause in an agreement, the grounds to excuse performance may be limited.

The idea of force majeure is based on the common law doctrine of impossibility of performance, which has very narrow application: the subject matter of an agreement or the means of performance must become objectively impossible.  Under the doctrine of impossibility, not all categories of unforeseen or uncontrollable events that impact a party’s ability to perform their obligations under an agreement will justify suspension or termination of their contractual obligations. 

Given this, the primary purpose of including a force majeure clause is to specify the types of events that the parties acknowledge will excuse their performance and to specify permitted recourse – for example, a pandemic or other causes which might not otherwise be covered by the doctrine of impossibility. 

Even if there is a force majeure clause in the agreement, such clauses are often strictly and narrowly interpreted.  A court may be unwilling to interpret a force majeure clause as being broader than its text, meaning the parties to the agreement should include specific details as to how the force majeure clause will work with respect to their agreement.  For example, unless the parties explicitly agree otherwise in the agreement, a force majeure clause will not apply to a situation that is known or foreseeable at the time the parties enter into the agreement. 

  1. What does the specific clause provide?

The content of a force majeure clause bears on the risk assumed by the respective parties to an agreement regarding unforeseen events or events beyond their control.  Although force majeure clauses can be heavily negotiated, they typically refer at least to events like “war, riot, fire, accident, and labor controversy” and specify the scope of recourse available to an affected party (e.g., the right to suspend production, the need to furnish services or the obligation to make payments).   Even if a clause does not explicitly identify a particular event that makes performance of obligations difficult, it may still permit force majeure to be invoked (e.g. by referring to “epidemic” but not “pandemic” which is an epidemic that has spread across a wide geographic area). 

Many clauses also refer more generally to business interruption for any reason “outside the control” of the party to excuse performance, but although useful to include such catch-all language, some courts may find it insufficient unless the actual event is similar to or a consequence of the specifically enumerated grounds.    In the absence of a detailed force majeure clause that enumerates the particular event inhibiting a party from performing its obligations under the agreement, it may be concluded that the affected party assumed that risk and cannot suspend or terminate its obligations. 

  1. Are all obligations subject to suspension or termination or only those specifically stated to be excusable?

The terms of a given force majeure clause might allow the affected party to suspend or terminate all obligations under an agreement, or terminate the entire agreement, or it may allow only partial recourse.  For example, a contract with a producer to furnish a recording of an upcoming live concert might require the producer affected by a force majeure event to substitute a similar program in its place or it may permit the producer to postpone delivery.

Because force majeure clauses are strictly and narrowly applied, if a specified force majeure event occurs, only the particular obligations that are stated to be subject to suspension or termination in the clause may so be suspended or terminated.  

  1. If obligations are suspended, when will they be reinstated?

Suspended obligations are reinstated in accordance with the provisions of the force majeure clause.  Depending on what was negotiated by the parties, reinstatement procedures may vary substantially from one agreement to the next.  However, force majeure clauses commonly provide that the duration for suspension of obligations will be for as long as the event giving rise to the suspension continues, and perhaps even for a reasonable time following the event for normal activities to resume.

Sometimes, however, parties negotiate that any period of force majeure suspension is limited to a maximum time period (e.g. six months).   After that period expires, the contract might entitle either party to terminate the agreement, or it might reinstate certain obligations even if the event continues. 

Without such details in the clause, it may be difficult to know when a force majeure event has fully passed and contractual obligations are restored.  Unlike a discrete force majeure event, such as work stoppage caused by a labor controversy that has a clear resolution, the current Covid-19 pandemic is likely to have long-lasting effects and its end-date may not be easily discernable.

  1. While the Covid-19 effects continue, the application of the pandemic to force majeure should be addressed directly in new agreements being entered into.

Force majeure clauses are highly customizable and contracting parties should consider how best to construct them given the particular circumstances of their agreement.

As parties negotiate new agreements for rendering services or granting rights, both sides should consider how the current Covid-19 pandemic affects their relevant industries, expectations and abilities to perform their obligations.   Accordingly, contracting parties should build necessary protections into their agreements, including provisions that, where advisable, address the current Covid-19 issue specifically. This is the best way to avoid uncertainty, particularly because the current pandemic is no longer an unforeseen occurrence.  

One approach for addressing the current situation in new agreements might be to acknowledge the initial suspension of activities for a specified period but provide for an outside date after which either party has the right to terminate the agreement.  Some obligations might also be imposed on one or both parties notwithstanding suspension of other obligations during this initial period.  For example, a party licensing rights to an intellectual property might require that an initial payment or series of payments be made in consideration of tying up its rights notwithstanding that other obligations will be held in abeyance.

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