U.S. Contractual “Outs” and COVID-19: Force Majeure, Material Adverse Effect and Frustration of Contract
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Key takeaways:
- As private industry and government authorities continue to react to the spread of COVID-19, market participants are evaluating the implications of the public health crisis for a wide range of contracts. This Client Update provides an overview of three doctrines that, depending on the facts and circumstances, may provide a basis for temporarily or permanently excusing performance of contractual obligations: force majeure clauses, material adverse events/change clauses and frustration of contract.
- Force majeure clauses in contracts allocate risk by excusing one party’s nonperformance when its reasonable expectations have been frustrated or its performance has been made impossible due to circumstances beyond its control. The applicability of a force majeure provision to a particular set of facts will depend in large part on specific contract language, which may relax or tighten the elements of establishing a force majeure and may impose specific notice requirements. The law in this area will be tested by developing events and will likely evolve quickly in the face of the COVID-19 outbreak.
- Material Adverse Effect (MAE)/Material Adverse Change (MAC) clauses generally contemplate a change in circumstances that significantly reduces the value of an enterprise, transaction or venture. The applicability of an MAE provision will depend in large part on the language of the clause itself and the specifics of the event alleged to constitute an MAE.
- Frustration of contract claims apply in situations where both parties are literally able to perform but, as a result of unforeseeable events, performance by one party would no longer give the other the benefit that induced that party to make the bargain in the first place. Parties should consider whether the underlying reason the contract was entered into has been categorically undermined by circumstances related to the outbreak.