Unforeseeable or unusual circumstances that prevent a party from fulfilling contractual obligations are sometimes called force majeure events. With the onset of the COVID-19 (Coronavirus) pandemic, contractual parties are likely to find that the obligations they bargained for in their agreement can no longer be performed. It is important in those circumstances to understand the concept of force majeure.
Force majeure is a risk allocation mechanism that considers circumstances outside of the control of the contracting parties. A typical force majeure clause might look like this:
- In the event that either party is unable to perform its respective obligations in this Agreement by reason of Force Majeure, then upon such party (the “Affected Party“) giving notice to the other party of such circumstances as soon as practicable after the occurrence thereof, the obligations of both parties, other than unpaid financial obligations accrued regarding periods before the occurrence of such Force Majeure event, shall be suspended to the extent and for the period of such Force Majeure event.
- As used herein, “Force Majeure” means any act, omission, or circumstance occasioned by any acts of God, acts of public enemies, wars, blockades, insurrections, riots, earthquakes, volcanoes, fires, storms, floods, disasters, sabotage, regulatory changes, extended weather conditions that broadly affect delivery of goods or materials, or other events or circumstances not within the reasonable control of a party preventing a party from performing its obligations (but not including governmental actions, orders, penalties, judgments, or requirements which such party could have prevented by compliance with applicable laws, regulations and standards).
To determine whether COVID-19 will excuse performance under a contract, you need to first look at the specific wording of the force majeure provision in your contract. If the force majeure clause specifically identifies “diseases, public health emergencies, pandemics, endemics,” then COVID-19 likely qualifies as a circumstance that relieves a party from its contractual obligations. Similarly, if the force majeure clause describes “travel bans or acts of governmental bodies,” then domestic and international restrictions on travel might also be relevant and in play. In the provision quoted earlier, which does not specifically cover disease or travel restrictions, the parties could look to the “circumstances not within the reasonable control” clause.
Typically, the party looking to use the force majeure provision needs to show a causal connection between the triggering event and the inability to perform the duty obligated under the contract. Force majeure provisions, depending upon how they are drafted, either excuse performance entirely without liability, or, as in the example above, suspend performance of the obligation until circumstances change (sometimes this also comes with time limits that, once met, allow for termination of the contract if performance still cannot be accomplished).
Force majeure provisions, however, shouldn’t be viewed as a “get out of contract free card.” Courts have historically interpreted force majeure provisions very narrowly. Courts will not allow force majeure to be an excuse if the event was reasonably foreseeable – this suggests COVID-19 is more likely to be accepted as an excuse if the contract was entered into months ago, as opposed to last week. Also, you cannot rely on force majeure if the impact of COVID-19 could be avoided by using prudent operating standards or expending commercially reasonable sums of money – depending upon the particular business, this may mean properly equipping employees or allowing employees to work remotely, rather than just saying “we’re closed.” Finally, if you’re considering invoking force majeure, remember other contract clauses that may need to be satisfied, such as notice requirements.
If a force majeure provision, per se, is absent from your contract, you may have to consider the legal doctrine of “frustration of purpose.” For performance under a contract to be excused under this doctrine, a party must show that (i) the event was not reasonably foreseeable, and (ii) the event radically changes the contract terms from what the parties had originally agreed.
A detailed review and analysis of the contract – considering insurance policies that may be in play, and ongoing business relationships among the parties – should be done to properly assess any impact COVID-19 may have on your contract.
This material is for informational purposes only. It is not and should not be solely relied on as legal advice in dealing with any specific situation.