Force Majeure and COVID-19: Can the Novel Coronavirus excuse a party’s contractual performance obligations?
As the world rapidly evolves and news continues to break daily regarding the spread and impact of the coronavirus (COVID-19), and as more cities and states issue stay-at-home orders (or lengthen those already in place), businesses and individuals may find themselves in a position where they can’t comply with the terms of their contracts. There could be a variety of reasons for an individual or a business to find themselves in this position during the pandemic, including stay-at-home orders that have shut down business operations, employee(s) have contracted COVID-19, individuals are no longer able to work because of stay-at-home orders or a COVID-19 diagnosis, business supply chain has been interrupted, etc. In times like this, many people and businesses start to think of Force Majeure.
Force majeure, which translates to “superior force,” is often referred to as the “act of God” clause in a contract. It is the legal concept that applies to relieve a party from its obligation to perform under the terms of a contract when its ability to perform has been impacted by an unexpected and unforeseeable incident. Even though the term is often used broadly, technically speaking, force majeure is the language of a contract itself that excuses a party’s performance in exceptional circumstances. However, these same principles can be found in statutes, the Uniform Commercial Code, or in common law doctrines like impossibility or frustration of purpose. There are a number of things to consider when trying to answer the question of whether force majeure applies to the current COVID-19 situation:
Review Your Contract Language
Force majeure is governed by the specific language of a specific contract, so the first place an individual or business should look is at the language of the contract itself. Force majeure clauses are generally in a section of the contract that spells out, and generally defines, certain situations that will excuse a party’s nonperformance. These clauses can be extremely lengthy and specific or they can be short and general depending on the contract and the relationship the contract governs. Force majeure clauses typically include a list of situations (force majeure events) that both parties agreed were sufficiently unpredictable, significant, and outside either party’s control that would excuse non-performance under the contract. General clauses usually list a handful of events and, many times, either party may claim relief under the clause depending on the event. Lengthy clauses may be more specific as to which events might excuse performance.
Common examples of force majeure events are: acts of God, civil unrest, acts of terror, natural disaster, strikes or other labor problems (other than those involving the party’s employees), or anything else beyond that party’s reasonable control. Although these lists can often appear comprehensive and broad at first glance, the devil is in the details. It is important to have a qualified attorney carefully review any contracts that may be affected by COVID-19, or any other force majeure event, because even those clauses that appear to be broad may pose potential hurdles to excusing a party’s performance. As the law rapidly develops during the pandemic, we expect to see more development on the applicability of general force majeure clauses to COVID-19.
Other Applicable Contract Provisions
There may also be provisions in a contract that discuss when a delay in performance is excusable under the contract or what circumstances may justify cancelling or terminating the contract altogether. While not explicitly dealing with “acts of God”, such provisions provide guidance as to how the parties’ relationship operates in the face of challenges. These provisions can be complex (and also can be found in multiple places in a contract document). You should seek qualified legal counsel to review your contracts both for force majeure and other similar contract clauses to see if there are applicable provisions for delayed performance or nonperformance due to COVID-19.
What if the Contract has no Force Majeure Clause?
Even if your contract does not contain a force majeure provision, common law doctrines such as impossibility, impracticability, or frustration of purpose may operate to excuse performance. Stay-at-home orders issued by many cities have impacted, if not entirely shut down, many non-essential businesses. COVID-19 has made it potentially unsafe for employees to get into work, and each new press conference presents its own challenges to performance under many contracts. In those instances where a business’s ability to perform under a contract is impossible, or the mutual purpose for which the contract was formed cannot be accomplished, there is a chance performance under the contract may be excused, but every situation is unique and should be evaluated under applicable legal standards.
No matter the type or extent of the force majeure language in a contract, or whether a contract has a force majeure provision at all, if a party thinks that COVID-19 may impact its ability to perform, it is important to approach the problem proactively. That includes evaluating the impact COVID-19 is having on your business and its operations, reviewing your contracts to see what impact COVID-19 may have on your ability to perform, and contacting an attorney to assist with review of the contract language itself to see if force majeure may apply. Contacting an attorney early to review contract language is an investment that may help mitigate the impacts of COVID-19 on your contracts and business operations.