Understanding and Managing Force Majeure Risk Resulting from COVID-19

In the last few weeks, as companies around the world have struggled to adapt to the dramatic changes brought about by the COVID-19 pandemic, one of the significant legal issues receiving attention is the potential application of force majeure (FM) provisions in legal contracts.  Often overlooked as boilerplate of no consequence in the ordinary course of business, suddenly these FM clauses have emerged front and center because of their potential applicability in limiting performance obligations under otherwise binding agreements.

We spoke with Stephanie Corey about this. She is the UpLevel Ops co-founder and co-founder of the leading legal operations trade organization CLOC, Corporate Legal Operations Consortium when she ran legal operations for large manufacturer Flex.  Steph has spoken to many in-house counsel and legal operations professionals during the crisis. She said –

“Many of our clients and my contacts across law departments are concerned about their contractual obligations – both in- and out-bound. They are eager for a systematic approach to reviewing large volumes of contracts for Force Majeure clauses. From UpLevel Ops work before and during the crisis, we know that this type of work requires both the right technology and the right human team. As in any high-volume contract situation, a competent offshore team offers the best value.”

In the first instance, even when a contract contains an FM provision, it’s far from certain whether it will become operative as a result of an event such as the COVID-19 pandemic.  Typically, there is wide variation in contract language, and there are a range of other issues that need to be determined as well, including choice of law, as well as notice requirements, which can end up materially affecting the rights and remedies under these FM clauses.  So companies that are party to hundreds or thousands of contracts find themselves scrambling to figure out exactly how their rights and obligations are affected by the FM provisions throughout their contract portfolio. It’s an issue that calls for immediate attention because rights and remedies may be forfeited unless timely action is taken.

Fortunately, a number of top law firms have written some helpful memos that summarize the key legal issues related to FM.  We’ve sorted through the huge avalanche of client alerts that have been published in the last few weeks and selected a few of them we found to be particularly helpful.  The links and summaries below should provide a good starting place if you need to get up to speed quickly on the basic legal issues involved in force majeure analysis.

Paul Weiss

A good place to start is with these two memos from Paul Weiss that explain the basic principles of force majeure, including the affirmative steps that contract parties are typically expected to take prior to exercising rights under a FM clause:

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Skadden

This memo from the team at Skadden discusses some broader commercial considerations that may affect the application of FM, in addition to the specific contractual language in the FM clause.  Skadden highlights other contract language, such as material adverse change clauses, that will also need to be reviewed, such as material adverse change clauses and choice of law provisions, which will materially affect the analysis for companies engaged in global trade.  that may provide similar remedies.

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Baker McKenzie

English law remains a major choice of law option for contracts related to global trade.  This memo from Baker McKenzie provides a good summary of the application of FM under English law, where there may be several distinct varieties of FM clause, including a general excuse of non-performance, or a version of an FM clause which may adjust commercial terms based on a defined change in economic or market circumstances (often referred to as  a hardship clause).  In contrast to New York law, which tends to construe FM clauses narrowly to limit their application, contracts governed by English law may include catch-all provisions, which may trigger FM clause applicability even in instances where the clause itself does not make specific reference to a pandemic as a triggering event.

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Pillsbury

This memo from Pillsbury includes a more detailed discussion of the major legal defenses that can be invoked in response to the exercise of a party’s rights under an FM clause, including foreseeability, exploration of alternate performance options and failure to give timely notice.

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Kira Systems

Kira Systems has been at the forefront in the development of AI software optimized for the analysis of legal contracts, which has proved to be an invaluable tool when it comes to the review and management of large contract repositories.  This is a link to a recent study Kira conducted of all the FM clauses contained in commercial contracts filed on EDGAR in the last 2 years which involved a counterparty based in China.  This study provides a sense of the magnitude of the legal issues the world is now facing as a result of global supply chain disruption, with more than 60% of all businesses reporting material delays in their order from China.

AI software can be a great tool for companies managing their own contract portfolios, as this recent blogpost from Kira illustrates, including sample FM clauses from a wide range of commercial agreements, including leases, indentures, and franchise agreements.

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How Cenza Can Help

The major takeaway from all these alerts and memos is pretty straightforward:  if your company has a large portfolio of non-standardized contracts, you need to act quickly to assess and manage the legal risks raised by the Corona virus.  An essential first step is to identify and analyze the FM clauses (and related provisions) that appear throughout your contract portfolio.  AI software is a great tool to use in order to promptly locate applicable FM provisions.  But there is no substitute for undertaking a careful human review of all relevant contract provisions in order to fully identify your potential rights, remedies and legal risk.

Ron Friedmann

Ron Friedmann

Ron has assisted law firms and legal departments to increase profits by improving practice and business management with knowledge management, process improvement, technology, and outsourcing. Ron writes the widely-followed Strategic Legal Technology blog, an ABA Journal Hall of Fame blog.

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