Force Majeure in a Pandemic

Apr 2020 // Ajamie LLP

Many written contracts include a force majeure clause – a provision excusing non-performance of the contract due to a significant unforeseen event. The coronavirus pandemic, the resulting government orders, and supply-chain disruptions raise questions about whether businesses can invoke contractual force majeure clauses. The answer is a qualified yes: force majeure clauses, plus additional legal doctrines, may excuse non-performance when performance under a contract has become impractical or impossible. This update will discuss when a force majeure clause could apply and how a business can invoke the clause or otherwise obtain relief.

General force majeure terms

The scope of a force majeure clause depends on the terms of the contract. A force majeure clause could state, for example: “If either party to this contract is unable to perform any act required under this contract by reason of strike, governmental order, natural disaster, act of God, or any other act beyond the reasonable control of the party (except the party’s financial inability), the performance of the act shall be excused during the period of the event.”

Some force majeure clauses are narrow, while others are expansive. Some specifically include epidemics, pandemics, and governmental orders as reasons not to perform or to delay performance. If a contract specifies a type of force majeure event, a court is more likely to excuse non-performance based on that event.

Even if a force majeure clause does not specifically name the event impeding performance, the clause nevertheless may be broad enough to offer relief. Many force majeure clauses include a catch-all provision that excuses non-performance due to an act of God or events beyond the party’s reasonable control. These catch-alls generally require that the event be unforeseeable at the time the parties entered into their contract. That is because reasonably foreseeable events, such as occasional supply chain disruptions or inclement weather within normal weather variations, are considered risks the parties allocated within their contract. Given the unprecedented world-wide disruption we now are experiencing, courts likely will consider the coronavirus outbreak and resulting business disruption an act of God or an event beyond the parties’ reasonable control.

A force majeure will depend on the specific circumstances surrounding the contract

Confirming the availability of a force majeure clause is only the first step, though. The party invoking the force majeure clause must show how the covered event affected the particular contract and what steps the party took to try to perform the contract anyway. If a contract can still be performed in whole or in part notwithstanding a force majeure event, the force majeure clause may not excuse complete non-performance. Accordingly, even in a nation-wide state of emergency, a party claiming force majeure will need to show that one or more events covered by the clause actually caused contractual non-performance.

For example, if performing a contract requires on-site personnel, a business that is under a government-imposed stay-at-home order might genuinely be precluded from carrying out its obligations. In contrast, a business that is not affected by a mandatory stay-at-home order, or a business whose employees can perform the contract by working from home, is less likely to obtain relief from contractual non-performance. Similarly, disruptions to a company’s supply chain may prevent performance of some contracts but not others.

As an illustration, in one case a court considered a force majeure clause that applied to “Work” to be performed under the contract. The contract defined “Work” as construction of a piece of equipment. The purchaser intended to use the equipment in an egg production facility. Due to an avian flu outbreak, the purchaser decided to downsize its operations and cancel its order for the equipment. The court determined that even if the avian flu was an unintended event beyond the contracting parties’ reasonable control, the flu outbreak did not prevent performance of the “Work” under the contract – that is, the avian flu did not prevent construction of the equipment. The court therefore ruled that the force majeure clause did not permit the purchaser to get out of the contract, and the purchaser was required to pay for the equipment despite the flu epidemic.

In another case, a turkey processor asserted that an avian flu epidemic made it impossible for the processor to carry out its contractual obligations. The court rejected this argument, explaining that the processor failed to show that it took reasonable actions to perform or try to perform the contract notwithstanding this excuse.

Catastrophic weather events provide another illustration of how courts apply force majeure clauses. A delay in contact performance due to typical variations in weather generally will not rise to the level of a force majeure event, while unusual weather conditions (such as Hurricane Katrina or Hurricane Harvey) might.

Following the 2008 financial crisis, courts reached different results on whether, in the context of the individual contracts before them, the crisis was a force majeure event – illustrating that both the unforeseen event and the facts surrounding the contract are important in determining whether contractual performance is excused.

Depending on the terms of the particular contract, a force majeure clause may offer relief from some but not all obligations under the contract. Commercial leases, for example, often require payment of rent regardless of whether an unforeseen event precludes the tenant from using the premises.

A force majeure clause generally will not excuse the failure to pay for goods or services that already were provided – the clause will only excuse future non-performance (or a delay in future performance). A force majeure clause also will not excuse a past breach of the contract.

Need to notify the other party

To claim force majeure, some contracts require formal notification to the other party within a specified time after the event begins, plus subsequent notifications of progress toward resuming contract performance. Individual contracts typically set out the means for providing notice, such as by email or courier to a particular person or set of persons. That is yet another reason to read and comply with the specific contract.

Consider how claiming a force majeure will affect other contracts

A company should consider the effect of a force majeure event across its entire business. If litigation ensues over performance of the contract, a party invoking a force majeure may need to explain why it asserted a force majeure for one contract but not another, for instance, or whether different customers were treated consistently.

A seller of goods generally must, for example, allocate production and deliveries among its customers in a fair and reasonable manner if an unforeseen event prevents it from fulfilling all orders. However, it is possible that some of the seller’s contracts may impose different or conflicting obligations. These obligations can involve a delicate balancing.

Even without a force majeure clause, other legal doctrines may offer relief from performance of a contract

Even if a contract has no force majeure clause, or if the force majeure clause does not cover the unforeseen event, other legal doctrines may provide relief from contracts that have become impractical or impossible to perform.

For example, if a sale of goods becomes commercially impractical, a seller may, in some circumstances, stop or delay sales or allocate goods among customers. The seller must, among other things, act in good faith and notify its customers.

In other situations, the legal doctrines of commercial impracticability, impossibility of performance, or frustration of purpose may offer a way out. To use these doctrines, the contracting party normally must first try to find other practical ways to perform the contract. The availability of these doctrines will depend on the terms of the contract, the contracting party’s individual circumstances, and the governing law.

Several other countries already have offered legal protection when an unforeseen event makes contractual performance impossible. France, for example, provides protection by statute when an unforeseeable event makes a contract impossible to perform. France has declared that the coronavirus outbreak is, in some circumstances, such an event. China, under its own laws, has issued force majeure certificates to certain businesses, giving them a defense to contractual non-performance under Chinese law. Relief offered under foreign law, however, is not necessarily dispositive as to contracts that are not governed by those countries’ laws. In the United States, as discussed above, courts look to the specific contract or legal doctrine and the reasons the contracting party could not perform.

Finally, if a business carries business interruption insurance, the business should consider reviewing the policy and making a claim.

Summary and steps to take

Courts in the United States generally interpret force majeure clauses strictly. It remains to be seen how the courts will interpret force majeure clauses in relation to the coronavirus pandemic, where the level of social and business disruption is unprecedented in recent times. To help ensure that a contractual force majeure clause or a similar legal doctrine will excuse non-performance of a contract, the affected business should:

  • Review the relevant contract and all amendments to determine whether the contract contains a force majeure clause
  • Understand the actual cause of the difficulty or impossibility of performing under the contract
  • Determine whether the force majeure clause covers the reasons the contract cannot be performed
  • Determine what steps could be taken, or what alternatives exist, to perform under the contract
  • If the contract cannot be performed due to events set out in the force majeure clause, determine what sort of notice must be given to the other party
  • Provide the notice required under the contract, as well as any required updates
  • Periodically assess whether circumstances have changed so as to allow resumption of contract performance
  • If the contract does not contain a force majeure clause, determine whether another legal doctrine applies that could excuse non-performance

by Dona Szak and John S. “Jack” Edwards, Jr.