COVID-19 Effects on Manufacturing Contracts – When is a “Force Majeure” a Force Majeure?

by Moheeb Murray and Michael Ohly

In today’s global economy, the COVID-19 pandemic has quickly affected manufacturing and the supply chain, creating issues including fulfilling labor, maintaining shipments, obtaining raw materials, and handling the health and well-being of personnel.  The term “force majeure” has become commonplace in the manufacturing industry due to these issues, but what does it really mean?  The expression refers to an unforeseeable circumstance that prevents the fulfillment of a contractual obligation.  A typical example is an earthquake, a war or other “act of God” beyond a parties’ control that prevents, and excuses, contractual performance.  Critically, though, whether any particular circumstance amounts to force majeure requires a close examination of the applicable terms of the particular contract at issue, and consideration of applicable contract principles.

The analysis of a potential force majeure relating to COVID-19 first requires a determination whether the applicable contract contains a force majeure clause and whether it defines or limits scenarios relating to health, safety, and government regulations.  In the absence of a force majeure clause in a contract, or if it does not address the circumstances that constitute such an event, parties must look to the applicable law.  For example, in contracts involving the sale of goods, the Uniform Commercial Code Section 2-615 provides principles on impossibility and impracticability of performance that will apply when there are gaps in a contract.  The UCC adopts many common-law principles.  And for other types of contracts, applicable common-law doctrines of impossibility, impracticality, and frustration of purpose may apply, even if force majeure does not.

Depending on the circumstances preventing fulfillment of a contractual obligation, force majeure or other applicable contract principles may apply.  Whether an obstacle to performance amounts to force majeure will also depend on the directness of its connection to the COVID-19 pandemic.  Regardless, a true force majeure, or other similar defense, will not necessarily excuse all performance.  It may extend deadlines or allow partial performance.  Furthermore, foreseeability is usually a factor for force majeure.  What is foreseeable today may be different than what was foreseeable two months ago.  Thus, these matters are time-sensitive.  A careful analysis of the circumstances and contract law is required to determine the applicability of force majeure.