The term "force majeure" takes us on a trip down memory lane to the law school classroom where our contracts professor spoke of antiquated doctrines of limited practical use. Or so we thought. As the COVID-19 outbreak continues to wreak havoc on industries and businesses around the world, disputes regarding breaches of contractual obligations are likely to increase. Therefore, it is important for companies to be cognizant of defenses they may raise in the event of possible claims. One that is particularly important during these turbulent times is the "force majeure" defense.
In essence, "force majeure" refers to a defense whereby a party may be relieved from contractual obligations if unforeseeable circumstances beyond the party's control prevent or delay the party from fulfilling its obligations under a contract. While most "force majeure" contractual provisions are unlikely to list disease, pandemics or government-ordered quarantines, many include general provisions covering natural disasters, "acts of God," or other circumstances beyond the parties' control. In fact, under Puerto Rico law, a party to a contract is not liable for unforeseen events or those events that can be foreseen but are inevitable. Importantly, however, in order to have this defense available, the person that invokes it must show that there were no other alternative means to comply with the obligations under the contract (increased costs, alone, is not enough to establish the defense).
In times such as this, when there is uncertainty as to when businesses will be able to resume operations, or what the effects of the COVID-19 emergency on them will be, the "force majeure" defense may be an option in the face of difficulties complying with contractual obligations. Moreover, while this defense is typically seen in contracts having to do with commercial transactions, product distribution, product manufacturing, supply chain, construction, events planning and general services, it may be useful for employers to verify whether there is "force majeure" language in their current employment contracts, including collective bargaining agreements.
What lessons have we learned from the COVID-19 experience and do we need to modify any of our existing contracts? Should employers revise their "force majeure" clauses to specifically consider pandemics or other disease outbreaks? What would be the damages available should an employer invoke "force majeure" and terminate an employment contract? Should an employer move to include a "force majeure" clause in their collective bargaining agreements? Should employers consider including these clauses moving forward in order to allow for the temporary suspension, or the early termination, of the employment contract?
The presence of a boilerplate or general "force majeure" clause could be considered insufficient when applied to situations such as the COVID-19 emergency. Therefore, it is important that companies give careful thought to the types of situations that may cause them to invoke the defense in the particular place where they operate. In Puerto Rico, for example, the experiences of Hurricane María in 2017, the earthquakes of early 2020 and the COVID-19 pandemic, with its subsequent shutdown order and curfew, should color the types of situations that should be specified under a "force majeure" clause included in contracts for Puerto Rico operations. Thus, instead of using general "act of God" language, examples could be included, such as natural disasters and epidemics. This type of clause should also include language as to types of business interruptions that would trigger its use, such as a temporary business downturn, or partial or total closing of operations as a result of any of these events, while the company recovers. Finally, the clause should also include the remedies that will be available to the employees should the clause be invoked, as well as any requirement of notices to be provided prior to invoking the clause and terminating the contract.
In sum, employers should consult knowledgeable counsel to review their existing contracts to determine what "force majeure" rights and requirements may be available in the event of a breach that is made necessary by the new conditions businesses are facing, as well as to draft new contracts with appropriate "force majeure" language.
Originally published May 12, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.