COVID-19 and Force Majeure Clauses: Are Your Contracts Enforceable During a Pandemic?
What do you need to know if your company or one of its counterparties is unable to meet its contractual obligations due to the novel coronavirus pandemic?
Recently, many of our healthcare and corporate clients have come to us with the same question: How do the events surrounding the novel coronavirus (COVID-19) pandemic impact my business? While there are many, many different ways to answer this question, one concern in particular as of late has been what happens if a company cannot fulfill its contractual obligations. Or, if a counterparty does not fulfill its obligations, what options are on the table?
Understanding the Implications of Force Majeure Clauses During the Novel Coronavirus Pandemic
What is a Force Majeure Clause and When Do These Clauses Apply?
When addressing potential contractual implications, the starting point is almost always to review the language of the contract itself. In the context of potential breaches or defaults during the novel coronavirus (COVID-19) pandemic, it is particularly important to determine whether a contract contains a force majeure or “act of God” clause that may apply given the circumstances at hand.
These clauses define (or should define) the specific circumstances under which contractual performance becomes too difficult, or even impossible, due to events beyond the parties’ control. If a force majeure or act of God provision is triggered, then either party may defer, suspend, or refuse to perform under the contract without penalty—potentially subject to notice or other requirements, as we discuss below. Typically, these clauses should enumerate the specific types of events that qualify as force majeure or an act of God. For example, war, floods, fires, terrorist attacks, and labor strikes are commonly listed as qualifying events excusing performance.
With regard to COVID-19, the World Health Organization (WHO) identified the virus as a “Public Health Emergency of International Concern” on January 30, 2020, and it formally declared a pandemic on March 11, 2020. Therefore, if a contract’s force majeure clause specifies that epidemics or pandemics are covered, then one or both parties may be able to cite the virus as a reason why it should not be held accountable for failure to perform. If a contract does not specifically identify pandemics or epidemics as events that excuse performance, it may still be possible to invoke a force majeure clause if it includes a catch-all provision covering “other significant events that are outside a party’s control” or similar language.
Seeking to Avoid Contractual Liability Based on Force Majeure
If a contract’s force majeure or act of God clause is broad enough to cover the novel coronavirus pandemic, this does not mean that performance is immediately excused. Instead, the party seeking to avoid liability must be able to show that its performance has been prevented, impeded, or rendered impossible (depending on the language of the contract) due to the pandemic. In other words, it must be able to establish a causal connection between the pandemic and its inability to perform under the contract. For example, if a shelter-in-place law prevents a company from operating because its employees cannot come to work, it is likely that an assertion of force majeure would be upheld. On the other hand, if a company failed to deliver goods on time merely because the post office was closed (but there were other shipping options available), it generally would not be able to rely on force majeure. In this same vein, most contracts provide that a party may not refuse to perform simply because its performance has become more expensive or it no longer stands to receive the profit it expected when it entered into the agreement.
Force Majeure is a Matter of Contract Law, Not Statutory Law
In the United States, there is no general right under the law to cancel or refuse to perform under a contract due to force majeure. If a contract does not contain a force majeureor act of God clause, then both parties must generally comply with the terms of the contract even in the case of a pandemic or other national emergency.
However, under the common law of most states, contractual performance may be excused if performance has become impossible due to factors beyond the non-performing party’s control. Impossibility is a high standard and may require a more significant showing than that required in order to avoid liability based upon force majeure. To prove impossibility, mere impediment or difficulty will not suffice. Instead, there must be either commercial or physical impossibility that relates to an obligation that is fundamental to the contract.
One simple example of impossibility related to the novel coronavirus (COVID-19) pandemic would be a contract to perform a concert at a venue that the government has forced to close during the pandemic. Due to the government-mandated closure, it would be impossible for the band to meet its contractual obligation.
Keep in mind that asserting force majeure should not be viewed as a slam dunk or free pass to avoid contractual performance obligations. State law requires that parties mitigate their damages (and commercial contracts often include damages mitigation provisions as well), so companies may need to pursue reasonable measures to lessen the harm to their counterparties if and when they invoke force majeure.
Exercising a Force Majeure Clause Due to COVID-19
When considering the possibility of invoking a force majeure clause, a company should determine whether its agreement requires notice, and it should timely comply with any and all notice requirements in order to avoid waiving its right not to perform. Even if it is not necessary to invoke a force majeure clause yet, it may be advisable to notify the other party that future events such as government-mandated business shutdowns and supply chain interruptions could make performance impossible, even if the company is still able to perform currently. With this type of proactive approach, it may be possible to negotiate an amicable and mutually-beneficial resolution that mitigates both parties’ financial risk.
If contract performance is to take place in a foreign country, or if an agreement is governed by the laws of a foreign country, then different rules may apply. For example, in China, civil law generally recognizes an implied right to refuse to perform a contract due to force majeure even if the parties’ agreement does not contain a force majeure clause. Reportedly, the Chinese government is currently issuing force majeure certificates to Chinese companies in order to support claims of inability to perform, although resistance to this effort has also reported as well. In any case, the relevant laws should be carefully reviewed with the assistance of legal counsel in order to assess any potential issues—and this should be done even if an agreement states that United States law applies if one or more international parties are involved.
Ultimately, if the parties to a contract cannot reach an agreement regarding the application of a force majeure clause or the impossibility of performance, litigation is likely to result. We recommend that companies carefully consider the language of their contracts and their potential liability if their actions are not upheld in court, and we encourage company owners and executives to consult with legal counsel before taking any steps to stop performance or payment under any current contract.
Speak with an Attorney at Oberheiden P.C.
If you have questions about your company’s contractual rights or obligations during the novel coronavirus (COVID-19) pandemic, our attorneys can help you make informed and strategic decisions with your company’s long-term best interests in mind. To schedule a free and confidential consultation, call 214-692-2171 or request an appointment online now.