Force Majeure Clauses, Commercial Impossibility, and Business Interruption Insurance

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Thursday, April 2nd, 2020; 1:40pm-2:40pm

Force Majeure Clauses, Commercial Impossibility, and Business Interruption Insurance

Panelists: Stephen Mysliwiec / Karen Marchiano / Erik Wulff

Webinar Summary –

Attorneys from DLA Piper discussed key elements of Force Majeure clauses, claims of commercial impossibility, as well as the ins and outs of business interruption insurance. The panelists noted that Force Majeure clauses are highly dependent on specific contractual language, and urged all businesses to read and review carefully their contractual obligations related to Force Majeure. Additionally, the panelists recommended careful and thorough review of property and business insurance policies to determine whether losses due to damage or civil authority orders might be claimed in these circumstances.

Key Bullets –

  • Force Majeure clauses contractually allocates risk of extreme events beyond control of contracting parties, and are highly dependent on the specific contractual language, as well as by jurisdictional interpretation and case history
  • Some FM clauses may cause different outcomes for continued business operation – read these carefully in your own contracts
  • In lieu of FM clause, there are equitable doctrines, including impossibility, impracticability, and frustration of purpose
  • Closely read your business and property insurance policies, as some may cover losses due to orders by a civil authority i.e. government mandated closures
  • Be aware of notice requirements

Full Bullets –

  • DLA Piper attorneys
  • Important reminders: we are not your lawyers; this is not legal advice; if you need legal advice, consult your lawyer

  • Force Majeure Clauses – Contractually allocates risk of extreme events beyond the control of contracting parties
    • Highly dependent on specific contractual language
    • Interpretation rules vary by state (NY is strict)
  • What are Force Majeure events? Check the language in your contracts:
    • Pandemics? Government orders? Acts of God? Catchall phrases?
    • Often narrowly construed
      • Varies by jurisdiction
  • Verbs may matter – Prevent? Hinder? Delay?
    • Some language is stricter than others
  • Is payment excused?
    • Depends on language and jurisdiction
    • Sometimes, other performance excused, but not payment
  • Effect of FM?
    • Excuse completely?
    • Allow delay?
    • Provide grounds for termination of agreement? Some agreements may be terminated if the FM situation stays long enough
    • Depends on language
  • Notice requirements
    • Check your contracts now if you have not already
    • Consider providing required notice now, even if uncertain – can lead to negotiated business resolutions; it makes sense to work for a business resolution that is workable in the short term
    • May assist with insurance coverage
  • Duty to Mitigate
    • Usually the contract indicates a legal duty to mitigate the FM clause
    • Practical and legal

  • Equitable doctrines when there is no FM clause
    • Impossibility
      • Standard for non-performance – typically high bar, other states have lower bar for non-performance (CA, Uniform Commercial Code)
      • Catastrophic event that was a risk that was not foreseeable when contract was entered into
    • Impracticability
      • Party’s performance is made impracticable by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary
      • Performance would be extremely difficult or unreasonable
    • Both impossibility and impracticability vary by jurisdictions; some states do not recognize impracticability
    • Frustration of purpose
      • Where a party’s principle purpose is substantially frustrated by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary
      • Varies by jurisdiction

  • Insurance
    • Property insurance
      • Direct physical loss or damage to property
      • Benefit of coverage would be limited (cost of disinfection, protection of property from imminent damage)
    • Business interruption insurance
      • Exclusions for loss caused by viruses and other pathogens – many insurance policies exclude this
      • Coverage for franchisee’s losses caused by orders of a civil authority
        • Prohibit or impair access to insured’s premises
        • Ingress/egress provisions
        • Policy will provide coverage because losses are not caused by the pathogen but by civil authority order/mandate
      • Coverage for unpaid rent under landlord’s policy
        • Landlord may have coverage for lost rent
        • Such coverage in landlord’s policy might include civil authority-related loss
        • Landlord and franchisees should be careful that any rent relief provided is required by lease or common law
      • Coverage for contingent business interruption
        • Triggered if franchisor or franchisee incurred losses because suppliers or customers were unable to fulfill their contractual obligations because of the virus
        • Franchisors lost royalties or marketing fees due to shutdown orders
    • Reading the insurance policy – no substitute for reading and understanding your policy and its “nooks and crannies”
    • Giving notice of loss to the insurer – give notice now – such policies indicate to give this notice promptly

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