Contracts in the Time of Coronavirus: A Series on Force Majeure, Impossibility, Frustration of Purpose, and other Doctrines Excusing Contractual Nonperformance.
Part I: Force Majeure
As the world braces for a possible prolonged battle with the coronavirus pandemic, the effects will most assuredly have wide-ranging impacts on business and contractual relationships. Business owners may be faced with labor and supply shortages, as well as government intervention, such as quarantines or emergency shelter-in-place orders, which will render non-performance of contractual duties ever the more likely. Despite the pandemic, contracts still remain valid and enforceable, and parties still face potential liability for breaches. However, for those faced with the difficult decisions of how to fulfill contractual obligations, these generational conditions may be able to excuse their performance under several doctrines of nonperformance. In this multipart series, the commercial litigation attorneys at FIDJ explore various doctrines which may excuse performance of contractual obligations. Part I of this series explores force majeure clauses.
Any party anticipating that it will not be able to perform its duties under a contract as a result of the pandemic should immediately look to their written contract to see if a force majeure clause is present and whether it applies under these circumstances. Generally, a force majeure clause is “a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.” Black’s Law Dictionary, 718 (9th ed. 2009). Phrased differently, force majeure clauses alleviate one or both of the parties from some or all of their obligations to perform under a contract when an unforeseen event beyond the parties’ control prevents or delays performance.
Broadly, a force majeure clause may contain: i) an exclusive list of events constituting qualifying events; ii) a non-exclusive list with broad catch-all language (for example “and any other event beyond the anticipation or control of the parties;” or iii) a general definition of force majeure with no list of qualifying events. When interpreting force majeure clauses, courts begin with the plain language of the contract itself, and construe the clauses narrowly.
In cases where express/exclusive language is used, courts hesitate to construe the clause beyond its own terms. This type of force majeur clause might feature a specific list of events, the occurrence of any of which would excuse a party from its obligation to perform under the obligation. To the extent a contract contains a non-exclusive list, which might describe those events in more general terms, courts analyze whether the claimed event, here a pandemic, is of the same nature as the events listed. In the final case, courts tend to evaluate whether the claimed event was reasonably foreseeable. The more likely an event was reasonably foreseeable, the less likely an excuse for nonperformance based on force majeure will be sustained. We also note that not only will contractual language determine what events are covered, it may also determine whether unanticipated events which merely delay performance, rather than making such performance impossible, are excused.
Determining whether a force majeure clause applies must occur on a case-by-case basis. In all cases, parties seeking to rely upon a force majeure clause, as well as those parties receiving notice of another party to a contract seeking to enforce such a provision, should take the following steps:
1) review the force majeure provision’s language to determine its breadth and whether the claimed event is, or could be argued to be, covered by the provision;
2) determine the governing law of the contract;
3) determine whether non-performance is linked to a claimed force majeure event or if subsequent actions also contributed to nonperformance;
4) determine whether the contract requires prior notice and, if so, whether the required notice was properly given;
5) determine what obligations of both the claiming party and non-claiming party are tolled (i.e. are payments of the non-claiming party tolled? What about exclusivity provisions?);
6) determine whether the contract provides a duty to mitigate such that a claiming party needs to take/demonstrate other efforts to satisfy the contract before performance can be excused by a force majeure clause.
As the coronavirus pandemic lingers, the possibility of nonperformance will continue to rise. Please contact us if you have any questions about any of these issues, as we will be working throughout this crisis, and advising our clients regarding their existing contracts, the consequences of non-performance, and how to prepare for an uncertain future. Feel free to contact us at 305-350-5690 or firstname.lastname@example.org.