Should Parties Color Outside the Lines of Force Majeure to Excuse COVID-19 Related Supply Chain Disruptions?

Foley & Lardner LLP

Foley & Lardner LLPThroughout the COVID-19 pandemic, manufacturers, suppliers, and distributors are attempting to mitigate the risks that accompany supply chain disruptions by incorporating a variety of related terms into their force majeure provisions, including pandemics, illnesses, labor shortages due to the pandemic, quarantines, and government shutdowns.  Notably, counterparties may respond negatively to such language, arguing that these circumstances do not constitute typical “force majeure” events.  Whether a court will agree depends, in part, on the state law governing the contract, the terms of the contract, and the underlying factual circumstances.  

For example, while some courts require that a force majeure event be unforeseeable, others may provide for excused performance regardless of foreseeability if the cause of non-performance is beyond the reasonable control of the non-performer.  Following the initial shock of COVID-19 on supply chains, the degree of foreseeability that a court will find in any subsequent disruption in the upcoming months is variable.  Additional limitations, like courts’ reticence to consider financial hardship alone as a reason for excused performance, or requirements for mitigation, may also complicate a party’s attempt to manage the future impacts of COVID-19 in the confines of a contract’s force majeure provision.

As such, parties in some jurisdictions may consider if there is a benefit to contracting outside the scope of a force majeure provision to best effectuate the intent of the agreement.  It may be that parties find a separate contractual provision for fact-specific contexts to be clearer, and perhaps easier for a court to apply. This approach would also side step a counterparty’s argument that certain events should not be included because a term does not fit the traditional force majeure mold.  Nevertheless, jurisdictional applications of law will still constrain this approach, and it may be that a provision purporting to allocate risk of non-performance will still be construed as a force majeure provision by a court.  Further, as additional provisions will likely be very fact-specific, it could be cumbersome to attempt to anticipate all circumstances in which intervening events or changed conditions will take place.  As a result, parties will need to continue to comprehensively analyze factors including governing law, the tenor of their relationship with a counterparty, and the scope of the agreement in deciding the best approach to handle potential COVID-19 related disruptions in contractual terms. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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