The COVID-19 virus and related government pronouncements (including government mandated or encouraged business closures and restrictions on travel and large gatherings) are having an unprecedented effect on the ability of many businesses to maintain operations and perform commercial contract obligations. Impacted contracts include, but are by no means limited to, manufacturing and supply contracts, leases, and contracts in the travel and hospitality industries.
This summary provides an overview of force majeure and other potential defenses to contractual non-performance related to COVID-19, and of practical issues for businesses to consider in evaluating, making, and responding to these defenses. The availability of these defenses is very fact specific, and dependent on the terms of the contract at issue, the cause of the non-performance, and the applicable law.
Force majeure clauses potentially excuse or suspend a party’s non-performance under a contract when extraordinary events outside the party’s control prevent the performance. Whether a force majeure clause will excuse non-performance depends on factors such as (1) whether the event falls within the contractual definition of force majeure; (2) whether the risk of non-performance was foreseeable and able to be mitigated; and (3) whether performance is truly impossible.
Issues we are seeing in force majeure clauses include:
- Does your force majeure provision specifically refer to a pandemic, epidemic, serious illness, plague, disease, or outbreak? The World Health Organization officially declared COVID-19 a pandemic on March 11, which might qualify.
- Does it refer to civil emergency, national emergency, or government acts? The federal government declared a national emergency on March 13, but reactions and official responses from state and local governments have varied widely and are fluid and changing. Government orders requiring businesses to shut down (such as San Francisco’s “shelter in place” rules) will strengthen force majeure arguments, while government “guidance” leading to voluntary closings will be less certain. Partial shut-down orders (e.g., restaurants limited to take out and delivery) fall in between.
- Some force majeure clauses discuss curtailment of travel, civil disorder, and—of course—broad catch-all language (“act of God,” “outside the parties’ control,” and so on). Depending on the jurisdiction, catch-all language may be construed narrowly (only the specific events mentioned in the provision will excuse performance) or more broadly (could excuse performance if the event was not reasonably foreseeable).
- Difficult market conditions or financial inability to perform generally will not excuse performance or qualify as unforeseeable events (even if the events that caused the financial turmoil were unforeseeable). And whether a court would consider the COVID-19 pandemic an “act of God” is uncertain. Most “act of God” precedent involves events like flash floods, earthquakes, and other natural disasters.
Related Potential Contractual Defenses
If your contract does not have a force majeure clause (or if the clause is not applicable), other defenses to excuse performance, such as the doctrines of impossibility or frustration of purpose, may be available depending on the jurisdiction. These defenses are less likely to be available under non-U.S. or international law, and their availability and application will vary between states.
- Impossibility of performance may apply when performance of a party’s obligations becomes objectively impossible. This includes the doctrine of “legal impossibility,” where performance becomes illegal. Given the fast-changing legal landscape (think shelter-at-home orders and required store or restaurant closures) this defense may become more common.
- Commercial impracticability, as described in Restatement (2d) of Contracts § 261 and UCC § 2-615, is similar to force majeure and discharges a party’s duty to perform when the party’s performance is made impracticable by an event that is not the fault of the party and the nonoccurrence of which was a basic assumption on which the contract was made. Here again, it is not enough that a contract becomes financially impracticable.
- Frustration of purpose may be available where — for unforeseen circumstances or events — the purpose of the contract can no longer be achieved. Generally, the frustrated purpose must be near total and so evident that without it, the transaction would have made little sense.
- Constructive eviction and/or similar defenses may arise under commercial or retail leases, depending on applicable law and on lease terms (e.g., clauses addressing quiet enjoyment or permitted use).
Practical Issues to Consider
Here are some practical suggestions for analyzing and addressing force majeure and related defenses:
- Carefully review and analyze contractual force majeure terms that might excuse performance, to determine whether they include events such as COVID-19 and the resulting consequences and governmental pronouncements.
- If the contract does not have a force majeure clause (or that clause does not seem to apply), consider whether an impossibility, impracticability, or frustration of purpose defense, or other defenses particular to the type of contract (e.g., leases, contract for sale of goods) can be raised.
- Can the party claiming force majeure or related defenses show that the event was unforeseeable, was outside that party’s control (without its fault or negligence), and caused the non-performance at issue?
- Is the party claiming force majeure or related defenses taking reasonable steps to mitigate the effect of COVID-19 and its consequences on the business (e.g., by permitting remote working if feasible)?
- Comply with any contractual notice requirements for force majeure or related defenses.
- Consider the applicable law and how it will affect force majeure and related defenses (Under New York law, for example, force majeure provisions are interpreted narrowly and only events specifically listed will excuse performance. In Delaware, the provisions are construed according to their plain meaning.)
The legal authority concerning these defenses and their application to COVID-19 are unsettled, and providing or responding to contractual notices for force majeure-related reasons require consideration of a number of issues. Nelson Mullins has a team of lawyers available to assist you and your business in analyzing and addressing these issues.