Given the current COVID-19 pandemic, contractual parties may find that they cannot perform their agreed upon duties or are incurring added unexpected costs. Force majeure, meaning “superior force,” is a common clause in contracts that may relieve both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, or an event described as an act of God, prevents one or both parties from fulfilling their obligations under the contract. Depending on the provision, it can also entitle the party to added costs or extend the time for performance.
The following is an example of a typical force majeure clause in a contract:
The term “Force Majeure” shall mean any cause reasonably beyond the control of the Party, and which by the exercise of due diligence such Party reasonably could not have been expected to avoid, and which it has been unable to overcome. Without limiting the foregoing, the following are examples of acts of “Force Majeure”: acts of God and the public enemy; flood, earthquake, tornado, storm, fire; civil disobedience, labor disputes, labor or material shortages, or sabotage; and restraint by court order or public authority (whether valid or invalid). If a Force Majeure renders either Party unable to fulfill any of its obligations under this Subcontract, such Party shall give prompt written notice of such fact to the other Party.
As is demonstrated by this clause, the right to relief can depend on both the nature of the event and a parties’ compliance with the requirements of the force majeure provision. Thus, in order to determine whether the COVID-19 pandemic will excuse performance under a contract, a party must first look to the specific language of the provision in the contract. For example, if the force majeure provision specifically identifies “diseases, public health emergencies, pandemics, endemics,” then COVID-19 more likely than not would relieve a party from its contractual obligations. Similarly, the restriction of domestic and/or international travel might also be relevant in analyzing a force majeure provision, including a “travel ban.” Language that excuses the parties from performance “based upon circumstances not within the reasonable control of the parties” could also entitle a party to relief and should be considered when determining whether the COVID-19 pandemic affects a party’s duties.
It is also possible that a party may be entitled to relief even if the contract does not contain a force majeure provision. Most contracts contain “change clauses” or provisions that provide the right to time extensions or additional sums if differing conditions are encountered. These provisions can entitle a party to relief even if there is not a force majeure provision in their contract. It also may be possible to obtain relief through certain common law remedies, such as mutual mistake, cardinal change and impossibility, or by arguing that the contract may now be contrary to public policy or illegal.
It is also extremely important to note that the mere occurrence of what could be considered a force majeure event or changed condition, often, by itself, does not entitle a party to relief. Instead, the party that is affected by the event must typically satisfy the relevant contractual requirements to assert a force majeure claim or the right to any other relief under the contract if it suffers impacts due to the current COVID-19 crisis. If it is determined that the COVID-19 pandemic renders a party unable to perform its obligation, it is extremely important to provide notice to the other parties to the contract as soon as is practicable. In no case should the party provide notice later than any specific period of time specified in the contract. Parties should also keep in mind that many contracts with force majeure provisions also require a party to use reasonable measures to mitigate the damages to the other parties when a force majeure event is encountered, which may include changes to the work location of the party’s employees and/or the employees’ job responsibilities. As a consequence, the non-performing party cannot merely rely upon the closure of an office.
Parties should also remember that Courts have traditionally been reluctant to enforce force majeure provisions. If the event was not reasonably foreseeable, a Court may excuse performance. However, it is also quite possible that as the COVID-19 pandemic continues, a Court may determine that the pandemic was reasonably foreseeable at a certain point in time and foreclose the reliance on a force majeure provision. Simply put, it is difficult to predict with any certainty how Courts will interpret force majeure provisions given the novel circumstances in our society resulting from the COVID-19 pandemic. As a result, contracting parties should not comfortably rely upon the presence of force majeure provisions in their contracts when they are trying to determine if they can avoid their contractual obligations due to the restrictions placed on business activity by local, state and federal governments in response to the COVID-19 pandemic.
Instead, a thorough review and analysis of any agreement and the underlying facts, including any insurance policies, should be done promptly to properly assess any impact that the pandemic may have on your contractual obligations and business operations before suspending performance or attempting to rely upon the argument that the COVID-19 pandemic entitles a party to avoid contractual obligations. Our office further recommends that, if possible, you secure the assistance of legal counsel when evaluating you contractual rights and/or asserting the right to relief under a force majeure or other contractual provisions as the assistance of counsel can allow a party to place itself in better position to obtain relief.
Maiello, Brungo & Maiello LLP is a full-service law firm that specializes in representing business owners. As part of its practice, MBM regularly assists and counsels commercial property owners, commercial tenants, developers, contractors and subcontractors in connection with contractual issues and claims.