The novel coronavirus (COVID 19) has ushered in a new disruptive normal. Curfews. Business shutdowns. Cancellations. Delays. Labor shortage. And yes, the fear of being sued for inability to meet contractual obligations due to the current situation.
For a lot of closely held businesses. The questions are never-ending. What obligations do I have under my lease? What do I do if I can’t meet my supply obligations? Can I suspend my business loan payments? The list goes on.
Since the outbreak, we have received calls and inquiries from businesses and individuals regarding their contract obligations considering the disruptive pandemic. As with most things, our answer is—it depends.
Some are familiar with the “Act of God” or “force majeure” clauses that appear in contracts. These clauses are sometimes relegated to the miscellaneous sections and often, given little concern. For many in America, these clauses usually discuss hyperbolic events of war, riots, pandemic, etc.
However, with coronavirus on our minds, the hyperbole is now reality. We are experiencing a global pandemic. With the pandemic, the force majeure clause, this relatively bland and mostly ignored clause, has taken center stage. And it may provide a lifeline for businesses at a time when glimmers of hope are needed.
What is a Force Majeure Clause?
Force Majeure (aka the “Act of God”) means unforeseeable circumstances that prevents one from fulfilling a contract. This principle is usually reflected in a clause drafted between contracting parties. Most variations of a Force Majeure clause serve as a “get out of a jail free card” for contracting parties in the event of natural disasters, war, riots, government intervention, pandemics, and other unforeseen events out of the parties’ control.
Typically, the specific verbiage of the clause controls and is relevant in determining: (a) what is covered? (b) how it is covered? and (c) the specific nature of the rights of the parties when these unforeseeable events occur.
It is important to look to the specific language of the contract in order to attempt to seek refuge under a force majeure clause. Simply invoking the magical words of “force majeure” or “Act of God” when the contract does not contemplate a pandemic (i.e. coronavirus/COVID-19) might not be enough to get out of or suspend a contractual commitment. In fact, doing so could lead to a repudiation of a contract, and might get you sued which will only compound the hurt once the dust settles. Therefore, it is important to review agreements and seek counsel from your business attorney. And if you don’t have one, get one!
I have no Force Majeure Clause in my Contract, Am I Out of Luck?
Not necessarily. Some contracts may not contain a force majeure clause. It is not uncommon. If your contract does not include specific or applicable force majeure language, then you may have some options under common law (or case law).
Under certain circumstances, if performance under the contract is deemed impracticable, the party charged with performing may be excused from performance. In general, “impracticable” means impossible to do or carry out.
Under the Uniform Commercial Code, which governs most contracts, three conditions must be met before a seller is excused from performance due to the defense that it has become impracticable to perform.
First, a contingency must occur. This means that some act, occurrence, event, omission, or delay must take place that affects the performance under the contract for some reason. For example, inability to produce goods due to low workforce or labor.
Second, performance under the contract must thereby be made impracticable. Third, the contract must have been made on an assumption that the contingency would not have occurred. Again, this defense arises when something that was unforeseen or unexpected occurs that the parties did not consider when determining performance obligations, like a pandemic forcing businesses to close, or a hurricane rendering businesses inoperable.
Limits on the Doctrine of Impracticability.
However, if the Force Majeure clause or the agreement contemplates crazy stuff happening like the coronavirus, then a non-performing party might not be able to use this common law doctrine to suspend or cancel a contract.
Further, even if these three conditions are met, impracticability does not absolve a party from performance that should have been performed prior to the contingency event occurring. For example, if payment under a contract was due and owing prior to a delayed shipment.
Additionally, courts have also held that the impracticable defense only excuses the nonperforming party for as long as the impracticability or frustration of purpose preventing performance lasts, unless performance after the event causing impracticability ends would be materially more burdensome than if the impracticability hadn’t arisen. So, what does this mean?
Well, it means once the impracticability of performing or acting under the contract ends, the nonperforming party has an obligation to perform as originally contracted unless to do so would be materially burdensome.
It goes without saying, but it still needs to be said— If you are unable to perform according to the contract due to manufacturing or delivery delays, lack of workforce, or other extenuating and unprecedented situations that have arisen due to the coronavirus outbreak, consult an attorney for advice on contract enforcement and defenses.
Act now. Proactive and timely actions could help reduce the likelihood or blunt the effects of contractual disputes that are bound to become reoccurring issues as businesses deal with the coronavirus.
P.S. In the meantime. Keep washing your hands, abstain from touching your face, and keep elbow bumping!
Contributions to the article also made by Emil Ovbiagele.