As businesses large and small face the prospect of contractual breaches due to the impact of COVID-19 and related governmental orders, force majeure provisions and other contractual defenses are coming into focus.
Recent and future COVID-19 developments may impact whether the outbreak and/or its effects constitute a force majeure event. As a result, it is important for businesses to assess the force majeure provisions in their contracts to understand the extent of their rights, remedies, and obligations with respect to their commercial business partners. And, even when the parties have not included a force majeure provision in their contract, there are several contractual defenses that may come into play due to the impact of COVID-19.
In general, force majeure clauses may excuse a party’s nonperformance under a contract when extraordinary events beyond either party’s control prevents a party from fulfilling its contractual obligations. The applicability of a force majeure provision is contract-specific and there is generally a high bar for enforcement of such a clause. Recent events, including the declaration of COVID-19 as a “pandemic” by the World Health Organization (“WHO”) and the implementation of local, state, and national mandates related to travel, movement, and health and safety, have altered the force majeure landscape in a manner that may impact the availability of such provisions as a breach of contract defense for nonperforming parties.
A contract may either explicitly list all events that qualify as a force majeure event or generally define a force majeure event as an event beyond the parties’ control. While the latter provision leaves more room for interpretation, courts will generally be the final authority on whether the event qualifies as a force majeure event under a given contract and whether the performance of the nonperforming party is truly impossible. As an added complexity, even if the force majeure provisions specifically list the event in question, a party typically cannot invoke a force majeure defense if (i) the event was foreseeable, (ii) the event could have been mitigated by the non-performing party, and (iii) the performance is merely impracticable or economically difficult rather than truly impossible.
COVID-19’s classification as a “pandemic” by the WHO will likely trigger a force majeure clause in agreements that expressly account for “pandemics.” However, the declaration of pandemic standing alone without a specific reference to “pandemics” in a force majeure clause will likely not automatically constitute a force majeure event. Alternatively, if the clause is silent on pandemics, epidemics, quarantine, or other viral outbreaks, there may be other languages available that triggers a force majeure clause. For example, many force majeure clauses contain an “acts of government” provision, and a government directive (e.g., shutting down an event or limiting movement of individuals) would likely trigger such a force majeure provision.
Recent governmental regulations intended to contain the COVID-19 outbreak may similarly make it easier to invoke a force majeure clause not initially triggered by the pandemic alone. Ever-expanding governmental restrictions on travel, movement, and large gatherings have resulted in significant business interruptions and widespread event and travel cancellations, with a particularly salient impact on the event, tourism, restaurant, airline, hospitality, and sports and entertainment sectors.
Other Contractual Defenses
Even when the parties have not specifically agreed to a force majeure provision in their contract, the common law defenses of commercial impracticability and impossibility may be implicated with mandated work stoppages and shutdowns and other events caused by COVID-19.
Many states recognize the doctrine of commercial impracticability as a defense to the performance of a contract. Generally, the doctrine states that when, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged. While this seems straightforward, many courts have limited use of the doctrine to situations in which both parties held a basic (though unstated) assumption about the contract that proves untrue. A government ordered shut down of business could certainly be argued to upset the basic premise of being able to operate a party’s business. However, simple economic impracticability – that is, that performance has become more expensive than anticipated – will not qualify for the defense. Lastly, some courts have held that a party claiming commercial impracticability “must use reasonable efforts to surmount the obstacle to performance.”
Impossibility is a related defense that is often conflated with the doctrines of commercial impracticability and “frustration of purpose,” Commonly-cited examples of these doctrines include: (1) the death or incapacity of a party necessary for performance, (2) the destruction or deterioration of a thing necessary for performance, and (3) a change in the law that prevents a person from performing. Again, a mandated work stoppage or shutdown would seem to be implicated here.
Ultimately, whether a party can exercise its rights under a force majeure clause or whether a party may invoke a common law defense to performance is a fact-intensive analysis that must be determined on a case-by-case basis. For more information or for assistance on interpretations of force majeure provisions in contracts, please feel free to contact our firm.
This alert is for informational purposes only and should not be considered legal advice.
Please consult with your legal counsel regarding any specific situation, particularly given that this is a new statute without implementing regulations at this time.
For further guidance on the legal issues facing businesses regarding this virus, contact:
David W. Elrod
Martha Hardwick Hofmeister
Jay S. Bowen
Bruce R. Wilkin
Timothy D. Zeiger