With the disruptions caused by the coronavirus (COVID-19) pandemic, many people are checking their contracts to see if they include a force majeure (or "act of God") provision.
"Force majeure" is the fancy name for a boilerplate provision included in many (but not all) commercial contracts. It excuses or delays performance under a contract due to a supervening event over which you have no control. With the disruptions caused by the coronavirus (COVID-19) pandemic, many people are checking their contracts to see if they include a force majeure provision and wondering whether it covers performance issues caused by the coronavirus health crisis.
What is a Force Majeure Clause?
Bad things can happen, like war, hurricanes, and pestilence. They can make it impossible for you to deliver on the promises you previously made in contracts with clients, customers, suppliers, or others. To ensure that you aren't obligated or found in breach of contract after a disaster strikes, many contracts include a force majeure provision (sometimes known as an "act of God" clause).
In order to invoke such a clause, the supervening event must make your performance inadvisable, commercially impracticable (very difficult), illegal, or impossible. For example, you can't fulfill a contract because your office or factory is shut down due to a government shelter-in-place order. However, you're not excused from performing just because it's inconvenient or more expensive than you originally bargained for.
If your contract has a force majeure clause, read it carefully. Here are some things to look for.
Is the coronavirus outbreak covered by the clause?
There is no such thing as a standard force majeure clause. They vary widely. Typically, they include a list of events that excuse or delay performance. Common examples include "acts of God," acts of government, war, terrorist attacks, riots or civil insurrection, earthquakes, hurricanes, tornados, floods, famine, and fire. Disease, contagion, pandemics, or epidemics may also be included, but not always. Often such clauses have a catchall provision stating that performance is also excluded by any event beyond the reasonable control of the affected party.
If your clause specifically lists pandemics, epidemics, contagion, or diseases as force majeure events, the coronavirus pandemic is likely covered by the clause. But what if it doesn't list those things? A court could conclude that the pandemic falls under an "act of God" or the catchall provision. If your business is subject to a government shutdown order, it could constitute an act of government. Unfortunately, it's not entirely clear in these cases. In the past, courts have construed force majeure clauses narrowly. We don't know yet whether they will continue to do so after the coronavirus pandemic.
What obligations are excused?
If the coronavirus pandemic is a covered event under your force majeure clause, you must then determine what contractual obligations are excused or delayed by the clause. Your performance may be automatically discharged. That is, the contract is terminated and you won't be paid (or have to pay the other party).
Or, performance may only be delayed—that is, you may be obligated to perform when you can. When performance is delayed, some clauses require the parties to the contract to continue making all payments required under the agreement. Other clauses permit delaying such payments.
Give Notice to the Other Party
If you intend to delay or stop performing under a contract due to the pandemic, be sure to give notice to your client, customer, landlord, other person or business. If you don't give timely notice, you may waive your right to rely on the clause. Many contracts contain a notice provision dictating how you should give notice to the other party—for example, by email, postal mail, or certified mail. Be sure to do whatever your contract requires and keep copies of the notice.
Your Duty to Mitigate
To rely on a force majeure clause, you must show that you took all reasonable steps to avoid or mitigate the damage caused by the force majeure event. For example, if your office was closed, you worked at home.
Keep Records
Be sure to keep records showing that performing your contract duties was impossible or impracticable—for example, a government shut-down order. Also, keep records showing that you (1) followed all the official guidance for dealing with the pandemic, and (2) took reasonable steps to mitigate its impact.
What if Your Contract Doesn't Have a Force Majeure Clause?
Not all commercial contracts have a force majeure clause. If your contact doesn't have one, a court won't create such a clause for you in the event you are sued for breach of contract. Instead, you'll have to rely on some other legal grounds to avoid liability for delaying your performance, or not performing at all. One ground is the doctrine of frustration or impossibility. This is a legal rule that says a contract automatically comes to an end if an event occurs after it is formed that:
- is not the fault of either party
- was not foreseen by them, and
- makes it physically or commercially impossible to fulfill the contract.
It's generally harder to avoid liability for breach of contract under the doctrine of frustration than if your contract has a well written force majeure clause. However, depending on the circumstances, the coronavirus pandemic could fall within this legal doctrine. But it's wise to seek legal advice before relying on it.
