The coronavirus has toppled business as we know it, and many companies are attempting to right themselves by scaling back, including seeking to be excused from contractual obligations pursuant to a “force majeure” provision in their agreements. Force majeure is one of a handful of standard “boilerplate” contract terms that is often skimmed over (at best) or overlooked by the parties, given its relative unimportance as compared to more substantive provisions. However, when faced with unexpected and/or uncontrollable circumstances, a precisely worded force majeure clause can sometimes offer a lifeline that will excuse one party’s performance obligations.
Is COVID-19 a force majeure event?
In the case of the COVID-19 pandemic, it is important to understand how a force majeure clause might come into play, whether you are the party looking to be excused, or the party trying to enforce the contract. As with many legal issues, the answer will depend upon a number of factors, including the following:
- Exact language of the contract. This is the most important assessment. Does the force majeure clause specifically mention things directly on point with the current public health crisis, such as “epidemic,” “pandemic,” “quarantine,” “virus,” etc.? Even more general terms like “national disasters,” “governmental legislation” and/or “acts beyond the reasonable control of the party” may also be applicable in this situation. If the foregoing examples are not listed, it is unlikely that the COVID-19 pandemic would be considered an “Act of God,” since this term is usually interpreted to mean natural disasters such as hurricanes, earthquakes, etc. However, if the force majeure provision clearly states that the list of examples is non-exhaustive, failure to list the specific event may or may not be relevant, or it may depend on the next bullet point.
- State law. What is the governing law of the particular agreement? In some states, it matters whether or not the specific item is listed, even if the list is intended to be non-exhaustive. In New York, for instance, courts have ruled that only events which are expressly and specifically stated in the force majeure clause are capable of excusing contract performance, and general catch-all statements such as “acts beyond the reasonable control of the party” are insufficient in that regard. In Delaware, Texas and California, the courts construe such catch-all phrases more broadly.
- Nature of the obligation. What is the specific obligation being requested to be excused? Is it delivery of a product or service, or is it a payment obligation? This is important as mere payment obligations are typically not excused (as explained below).
- Specific facts and circumstances. How is COVID-19 directly impacting the ability to perform under the contract? For example, is performance now impossible, possible but more difficult, or just more expensive? In the case of products, is the virus impacting the delivery of goods, or the actual production? If the contract involves the provision of services by an individual, can the service be provided by a replacement?
- Foreseeability. Another factor to be considered is whether COVID-19 was a foreseeable event. Before this pandemic hit, no one could have predicted the global shutdown of business we are now experiencing. However, in today’s “new normal,” it would be hard to argue that the coronavirus was unforeseeable. Nonetheless, most courts are reluctant to overturn clearly stated contractual intention. Therefore, if a force majeure provision clearly indicates that a particular event is to be considered a force majeure, whether or not it is foreseeable, then foreseeability may no longer be a factor. However, foreseeability may be a factor with respect to secondary causes. For example, if an earthquake is listed as an express contractual excuse, but a tsunami is not, then if a tsunami occurs as a foreseeable result of an earthquake, a court may find it to be an excusable event.
Assuming COVID-19 is a force majeure event under the terms of the agreement, then what?
If excused under force majeure, it is important to understand how this determination will impact performance under the agreement:
- Duration of excuse. A force majeure clause typically does not excuse performance completely; instead, it merely suspends or delays fulfillment of an obligation for the duration of the force majeure event. When that event ends, obligations usually will kick back in. Nonetheless, it is still important to determine whether or not a force majeure event exists because, if the event lasts long enough, there may be a termination right within the force majeure clause which allows a party to exit the deal entirely without incurring any liability to do so.
- Payment Obligations. Even if one party is excused from performance under an agreement, it is possible that the other party’s obligations will continue, particularly with respect to making payments. In fact, under many state laws, and even sometimes as expressly written in the force majeure clause, payment obligations are not excused by a force majeure event. That said, in some instances, the force majeure clause may include specific language excusing a party from payment in the event and for the duration that the other party is excused from its obligations.
Therefore, if you receive notice of a force majeure event, it is important to review the terms of the agreement before making your next payment. If you are required to continue payment, but are prevented from doing so (such as if all banks are closed due to some unforeseen emergency), some state laws may allow a temporary deferral of payment (while banks are closed). However, failure to pay because you can no longer afford to do is usually not forgiven, even if this inability to make payment is due to unforeseen circumstances.
- Notice: To invoke the force majeure clause, a party usually has to notify the other party of its intention to do so. This notice requirement may be spelled out in the force majeure clause, including any required documentation and the specific method by which the notice must be sent (e.g. registered mail/overnight mail). If the clause mentions written notice, but the specifics to the requirement is not found in the force majeure clause, it is often found in a separate notice provision in the agreement.
In the event the force majeure clause is silent as to any form of notice, the party seeking to be excused should send a formal written notice to the other party once a triggering event occurs. Notice helps to document your position, especially in case of future litigation; and if termination rights are included in the force majeure provision, notice will start the clock ticking. Failure to send timely notice (within a certain amount of time after the alleged force majeure event begins) may waive your right to assert it.
- Mitigation: If performance is prevented by a force majeure event, the express language of the clause may require you to take good faith steps to mitigate the effects of your failure to perform. Even if not expressly stated in the agreement, mitigation may be required under applicable state law. In California, for instance, the law requires a demonstration of “reasonable” or “sufficient” effort to reduce the effects of the force majeure event. If you are the party who wishes to enforce the agreement, you can try to renegotiate the agreement and/or require that the other party provide (i) evidence on which it relies, (ii) a statement as to why performance is delayed/impossible, (iii) a list of actions it is taking to mitigate; and (iv) continuous updates as to efforts to recommence performance.
No force majeure clause?
Unfortunately, if an agreement does not include a force majeure clause, this right cannot be asserted under common law; force majeure is solely a contractual right. However, if the contract involves a sale of goods, the Uniform Commercial Code (UCC) would likely apply; and in this case, the sale may be excused if the seller’s performance has become impracticable due to unforeseen events at the time of contracting. Also, keep in mind that certain other rights and defenses intended to excuse performance might be available under common law, such as impossibility and/or frustration of purpose; however, those remedies tend to have more limited enforceability.
In summary, the question of whether COVID-19 is an accepted force majeure event can only be answered on a case-by-case basis. However, generally speaking, performance is most likely to be excused if it is impossible to perform due to the coronavirus. On the other hand, if the virus only makes performance more expensive, it is unlikely to be viewed as a viable force majeure event. Ultimately, the answer lies in the facts, circumstances, specific list of what is included in the force majeure provision, state laws and the degree to which performance is impacted.
Going forward, it is best to ensure that all contracts contain a force majeure provision which specifically includes communicable disease outbreaks, endemics and pandemics, as well as precise terms discussing the parties’ rights and obligations and procedures following a force majeure event.
If you would like to learn more about force majeure, or if you have questions about performance under a commercial contract, please contact Stacey Heller at [email protected] or (703) 403-5347.
Stacey Heller is an experienced transactional attorney and has worked with companies in a variety of industries, including technology, retail, telecom, advertising, hospitality, and real estate and construction. Stacey regularly handles a broad range of work for her clients, from commercial agreements to real estate (commercial leasing and construction), as well as dispute resolution matters. Stacey can be reached at [email protected] or (703) 403-5347.
This publication should not be construed as legal advice or a legal opinion on any specific facts or circumstances not an offer to represent you. It is not intended to create, and receipt does not constitute, an attorney-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal questions you may have. Pursuant to applicable rules of professional conduct, portions of this publication may constitute Attorney Advertising.