COVID-19 and Breach of Contract
As the COVID-19 pandemic derails and disrupts industries throughout the world, parties find themselves flipping to the back of their lengthy contracts to dust off an often included and more often ignored provision: the force majeure clause. But, will they find help there? How will courts interpret force majeure clauses in the new world shaped by the COVID-19 pandemic? And, how should parties move forward?
WHAT CONSTITUTES FORCE MAJEURE
The French term force majeure translates literally to “superior strength.” The concept is generally defined as an “event or effect that can neither be anticipated nor controlled” that “prevents someone from doing something that he or she had agreed or officially planned to do.” Many contracts contain force majeure clauses excusing performance under such unanticipated circumstances.
The term force majeure is often conflated with the phrase “act of God.” They have different meanings and scope. An “act of God” is generally considered an unexpected and uncontrollable natural disaster that impedes performance. Force majeure clauses in contracts typically excuse performance under such circumstances. Usually, though, they go further by including a comprehensive “parade of horribles,” natural and unnatural, that excuse performance, such as hurricanes, tornados, floods, explosions, terrorism, war, blockade, embargo, strikes, lockouts, nuclear emergency and on and on and on. Parties to a contract can include any specific scenario they choose.
If the event is not specifically listed, that is not the end of the analysis. The inability to foresee the occurrence of a force majeure event is a fundamental rationale for the clause. It is understandable, then, that parties often fail to explicitly list all events that constitute an excuse for performance. Often, our most important failure is one of imagination. For that reason, most force majeure clauses contain “catchall” provisions, such as: “…or any other emergency beyond the parties’ control, making it inadvisable, illegal, or impossible to perform their obligations under this Agreement.” Courts interpret these provisions narrowly, and will compare the claimed event to those specifically itemized in the clause for guidance. Most courts have held that economic hardship alone does not qualify.
The COVID-19 PANDEMIC AND FORCE MAJEURE
To determine whether the COVID-19 pandemic constitutes a force majeure event sufficient to excuse performance, the starting point is the “parade of horribles.” While not common, the terms “pandemic” and “epidemic” do appear in many such clauses. For instance, after cancelling the remainder of its season, it did not take long for the NBA to point out the presence of the term “epidemic” in the force majeure clause of the current collective bargaining agreement.
Even if those terms are not explicitly included, there are other options. Did the pandemic prevent performance, or the reaction to the pandemic? For instance, a company’s inability to perform may not be due to its workforce contracting COVID-19, but instead because the State of Colorado ordered the crew to stay at home. Terms such as “governmental” or “regulatory action” are often included in force majeure clauses and may be broad enough to qualify.
Even under normal circumstances, there would be plenty of room for argument. Considering the losses, a considerable amount of litigation is likely. The unique complications of this pandemic will exacerbate this. When did the pandemic start? When will it end? If there are waves, does a trough qualify? A war begins with a declaration and ends with an armistice. Hurricanes, tornadoes, and wildfires are readily identifiable. In this highly partisan environment, the pandemic is amorphous. What happens if the governor has opened the state for business but a party refuses to perform for safety considerations?
HOW TO PROPERLY INVOKE A FORCE MAJEURE CLAUSE
Most force majeure clauses contain strict notice provisions. Such provisions must be followed to the letter. Even in the absence of specific notice requirements, a party should provide immediate notice of the impediment and provide continuous updates. The purpose of the requirement is to allow the other party to make alternative arrangements and mitigate the impact of the non-performance. Delayed notice, especially if provided for the first time after the deadline to perform has expired, may result in waiver.
Additionally, a party must attempt to overcome the impediment. If there are alternative avenues of performance, those must be explored, even if the cost is increased. A party seeking to be excused should demonstrate prudence, due diligence, and the exercise of care. Difficulty is not the same as impossibility.
COMMON LAW RELIEF
Even in the absence of a force majeure clause, relief may be found in common law defenses such as impossibility, impracticability, and frustration of purpose. Where performance is impossible through no fault of the contracting party, performance may be excused. Impracticability may be a defense where, though possible, performance has become unreasonably and excessively expensive due to an unforeseeable supervening event, the nonoccurrence of which was a basic assumption of the contract. Finally, the doctrine of frustration of purpose may excuse a party in certain situations where the objectives of the contract have been utterly defeated by circumstances arising after the formation of the agreement.
PRACTICAL TIPS FOR COVID-19 AND BREACH OF CONTRACT SCENARIOS
- Include a force majeure provision in your contract. Do not rely on the common law defenses, which are vague and subject to interpretation. Specifying the exact circumstances that excuse performance will allow parties to make confident decisions during times of uncertainty.
- Include a comprehensive “parade of horribles.” Parties can contractually agree to excuse performance under any specific circumstance. This can include foreseeable events (such as market collapse, price swings, or recession) if specifically included. Now, more than ever, our imagination should be expansive. Every force majeure provision includes the standard events such as major natural disasters, wars, and strikes. Businesses should use this opportunity to include more creative scenarios tailored to their needs.
- Remove the phrase “act of God.” This vague phrase not only creates uncertainty, which breeds litigation, it opens a can of worms. Imagine a jury, six different people with six different religious and political backgrounds, trying to determine if a business’s inability to perform during the pandemic was caused by an “act of God” as opposed to local regulations, Donald Trump, or the Chinese government.
Force majeure clauses and the common law defenses of impossibility, impracticability, and frustration of purpose may provide companies needed relief in this difficult economic environment. Now is the time to review these clauses and doctrines to determine how they might affect current contracts and plan for the future.