Jordan Lipp, Partner | Childs McCune
March 27, 2020
With the Coronavirus (COVID-19) pandemic, medical device companies are facing disruptions to their supply chains, vendors who simply stop providing services, and a denuded work force. Who is responsible when the supply chain fails due to a pandemic? What should a company do when its vendors stop all work because their employees must stay home? And what can a company do when it can’t meet its supply obligations due to its own employees in quarantine?
Due to the current challenges presented by the COVID-19 pandemic, an oft-forgotten contract clause, usually found among the miscellaneous clauses at the end of a contract, has suddenly taken a front seat. This is the “force-majeure” clause of a contract, also sometimes known as the “Act of God” clause. A force-majeure clause addresses the allocation of risk between the contracting parties if the contract cannot be performed due to an unanticipated or uncontrollable event.
This blog provides a quick primer for attorneys and businesspeople on force-majeure clauses, which are not usually on the forefront of medical device companies’ minds. A classic example of a force-majeure clause, as set forth in Corbin on Contracts, is as follows: “Neither party shall be liable for its failure to perform hereunder if said performance is made impracticable due to any occurrence beyond its reasonable control, including acts of God, fires, floods, wars, sabotage, accidents, labor disputes or shortages, governmental laws, ordinances, rules and regulations.” 14 Corbin on Contracts § 74.19 (2019) (further citations omitted).
There are several key components of a force-majeure clause, which are discussed next.
Mutual or One-Way Force-Majeure Clauses – Force-Majeure clauses can be drafted to benefit one party to a contract, or they can be drafted to benefit both sides of a contract. The example from Corbin on Contracts, above, is a mutual force-majeure clause. It can benefit either party when there is a force-majeure event (such as a pandemic).
However, not all force-majeure clauses are mutual. Many are written excusing only one side from performance should a force-majeure event occur. For example, the above clause could instead have been written “Party A shall not be liable for its failure to perform hereunder if said performance is made impracticable due to any occurrence beyond its reasonable control, including acts of God, fires, floods, wars, sabotage, accidents, labor disputes or shortages, governmental laws, ordinances, rules and regulations.”
Epidemic Language in Force-Majeure Clauses – Many force-majeure clauses specifically reference force-majeure events to include occurrences such as “epidemics” and “quarantine restrictions.” Many other force-majeure clauses do not.
However, as long as the force-majeure events are written in a broad manner, there is a strong likelihood that courts will consider the COVID-19 pandemic to be a force-majeure event, regardless of whether the specific word “epidemic” is contained in the force-majeure clause.
Similarly, force-majeure clauses often require that the force-majeure event is something beyond the control of the performing party. As an example, a component part supplier in China may well be able to invoke a force-majeure clause from the COVID-19 pandemic. On the other hand, a supplier of services to a medical device company (such as an accounting firm) may be less able to invoke such a clause as suppliers of services can often continue to work from home.
Notice – Many force-majeure clauses have a notice requirement. The notice requirement means that in order to invoke the clause, a party must provide notice to the other parties. For example, hog shipments did not occur due to an outbreak of Porcine Reproductive and Respiratory Syndrome. As most hog suppliers did not provide written notice of a force-majeure event, those suppliers could not invoke the force-majeure clause when sued for not delivering hogs per their contractual agreement, even though there was no dispute that the outbreak was a force majeure event. SNB Farms, Inc. v. Swift & Co., 2003 U.S. Dist. LEXIS 2063, at *30-31 (N.D. Iowa Feb. 7, 2003). Meeting notice requirements is critical.
Effect of Force-Majeure Clause – Force-majeure clauses can do more than simply excuse a party from performing under a contract. A standard provision is that a force-majeure event does not excuse performance under the contract, but simply extends the obligation until after the event is over. As such, a supplier may not be obligated to supply materials during the force-majeure event (e.g., the COVID-19 pandemic) if it is unable to obtain the materials. Once the materials become available, however, it must resume shipment.
Lack of a Force-Majeure Clause – What happens when the contract does not contain a force-majeure clause? The common law defense of impossibility of performance can still protect a non-performing party, when the non-performing party did not cause the event rendering performance impossible. The term “impossibility” means not only strict impossibility but impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved. As such, the circumstances of what performance is, or is not, rendered impossible by the COVID-19 pandemic will likely revolve around the nature of the contract and the possibilities open to the parties.
Conclusion – As medical device companies address the supply chain and similar issues raised by COVID-19, prudence dictates that they and their attorneys focus on the details and ramifications of force-majeure clauses.
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