The outbreak of the novel coronavirus, which causes the disease COVID-19, has had significant impacts on companies and their commercial transactions resulting in disrupted supply chains, delaying supplies to companies and in some cases the performance obligations. As a result, many businesses may be wondering if they can be excused from their contractual obligations due to these events. Oftentimes contracts will provide for relief to a party from liability for non-performance or delayed performance due to events beyond a party’s control, also called a force majeure event.
When determining if a contract’s force majeure clause will be applicable as a result of the COVID-19 pandemic, there are a number of key issues to consider including:
- Whether COVID-19, a pandemic, or similar event is specifically listed as a force majeure event in the contract. However, even if COVID-19 or a similar event is listed, other requirements may need to be satisfied before the force majeure clause is applicable.
- Whether the force majeure clause contains catch-all wording. Phrases such as “other similar events” or “Acts of God” may be applicable, this will depend on the rest of the force majeure clause, the contract, and the circumstances causing the non-performance. It should not be assumed that a catch-all clause will apply to COVID-19 as such clauses are generally enforced narrowly by the courts.
- Whether the clause excludes foreseeable events. The contract may exclude events that could have reasonably been provided against, avoided, or overcome. If so, a force majeure clause that does not specifically list COVID-19 is unlikely to apply to new contracts entered into after COVID-19 became well known, and thus foreseeable.
- Whether causation has to be established. Depending on the contract, it may be required that the impacted party need to show a causal link between COVID-19 and its failure to perform. This will depend on the exact wording of the contract. Generally, an impacted party must show that it is impossible and not just difficult or unprofitable to perform.
- Whether there is any duty to mitigate. The impacted party may be required to show that it took reasonable steps, in good faith and with due diligence to mitigate or avoid the effects of the force majeure on its contractual performance.
- Whether the force majeure clause contains any exclusions. The parties must determine if any exclusions set out in the force majeure clause affect their rights and obligations. Oftentimes, force majeure clauses will not excuse a party’s payment obligations.
- What the notice requirements are. The contract may have notice requirements for the force majeure clause to ensure timeliness, complete content, and proper delivery method identified for any force majeure notice.
- Which state’s law applies. The choice of law and choice of forum provisions in the contract inform how a force majeure clause is interpreted. Industry or trade practice may also be relevant to the clause’s interpretation based on the state.
- What the consequences of a force majeure event are. The results of establishing force majeure will depend on the language of the contract and potentially provide for temporary relief from performance or give rise to a right of termination if it continues for an extended period.
Many contracts include specific events in force majeure clauses, which may apply to COVID-19, these terms include:
- A pandemic or epidemic. COVID-19 was declared a pandemic on March 11, 2020. However, this is only the first step of the analysis. Causation and notice must also be analyzed.
- A public health emergency or communicable disease outbreak. Although this provision will apply, issues such as causation still need to be addressed.
- A quarantine. Even if a quarantine is in place, a contract party may argue that it is not a force majeure event if it affects individuals but not the impacted party as a whole.
- Government or administrative action or changes in laws or regulations. If a state imposed lockdown or forced shut down of businesses has occurred, as it has here in Idaho, force majeure may arguably apply under such provisions.
- Failure of upstream suppliers. If the force majeure clause provides for upstream supplier defaults or delays, there may be an excuse for delayed performance while the party finds another supplier.
As additional states and other government declarations restrict travel, force closures of businesses and cancel events, companies may be more likely to prevail on a force majeure declaration. In addition to force majeure other defenses for non-performance may be available. Depending upon the applicable law, these excuses may have different interpretations, but generally are narrowly interpreted and applied.
- Impossibility. The contractual obligations of a party can be excused if its performance becomes objectively impossible because of a supervening event beyond its control. To successfully use this excuse, performance must be impossible, not just expensive or difficult to implement. Generally, impossibility will apply when a promisor dies or is incapacitated, requires the continued existence of a specific thing and that thing perishes or is unavailable, or when performance is prevented or prohibited by operation of law.
- Impracticability. Performance will be excused when a party can demonstrate that a supervening event has caused performance to be so difficult and expensive that it becomes impracticable, though technically possible. For a supervening event to discharge a duty, the non-occurrence of that event must have been a basic assumption underlying the contract.
- Frustration of Purpose. This is a limited excuse that applies in some jurisdictions when due to a supervening event, the impacted party’s main purpose for entering the transaction is destroyed or removed. The frustrated purpose must be so much the basis of the contract that without the transaction makes little sense.
Many companies carry a variety of insurance policies that may help to mitigate losses related to COVID-19. For further information regarding insurance and what may apply as a result of the current pandemic see our prior blog post