As the coronavirus spreads, every business is likely thinking about how it will impact their ability to deliver or pay for goods and services. Pandemics such as COVID-19 may provide a valid reason for nonperformance of a contract, but it depends on the circumstances and the language of the force majeure clause.
A force majeure clause is a common contract clause that excuses a party’s inability to perform its obligations under the contract because of an unforeseeable extraordinary event or circumstance beyond the control of the parties. Examples of events that may trigger the clause include war, strikes, acts of God (earthquake, flood, hurricane, etc.) and epidemics. However, all of these may not be covered in relation to a particular contract as the specific language of force majeure clauses may vary.
In order for a party to rely on the force majeure clause to avoid their contractual obligations, it must be determined whether the clause applies to the situation at hand. The first step is to examine the contract language. Some contracts list specific events that are covered while others have broad categories or a catch-all that applies to any events outside the reasonable control of the party affected.
The event at issue must also have been unforeseeable at the time the contract was signed. For instance, if a business contracted with a party who was already dealing with delays due to the coronavirus, further delays would not be deemed unforeseeable.
There also must be a causal link between the event and the resulting non-performance. For example, a manufacturer could be excused from nonperformance if it could not get supplies because its suppliers had to close their facilities due to the coronavirus. A movie or theatrical production may be shut down if actors and crew are prohibited from traveling due to coronavirus-related travel bans or audiences cannot attend because of a ban on large gatherings. However, an employee who always worked from home and whose ability to do so has not been hampered by the pandemic may not be excused from performance.
Some force majeure clauses will allow for more discretion in applying the provision than others. For example, a commercial office lease may permit a tenant to pause its payment obligations if it voluntarily opts to work from home out of an abundance of caution. However, other contracts will require a government mandate requiring all non-essential persons to stay at home before triggering the force majeure clause.
Finally, the effects of the force majeure event must be so severe that the contractual obligations cannot be performed. If the manufacturer in the example above could easily find alternative suppliers or the original supplier was only minimally delayed, then the clause may not apply. Simply having some additional costs or reduced profit is not considered to be severe enough to trigger the clause. However, courts will evaluate what is reasonable and consider the additional cost and burdens involved, when determining whether the force majeure clause should be applied.
If the force majeure clause does apply, the nonperforming party’s obligations may be suspended while the force majeure event lasts. Where the event lasts a prolonged period, the parties may be entitled to terminate the contract.
If the clause does not apply but a party has been affected by an event outside their control, it may be beneficial to discuss the matter with the other side to try to renegotiate the contract. In any event, it is essential to examine insurance coverage for business losses as well as consult an attorney to discuss legal remedies.