By William K. Flynn
Added to the stressors facing anyone trying to operate or save a business during this pandemic, is whether you will be able to meet your contractual commitments or expect return performance by your counter parties. Looking past the current disruption in every corner of the economy, businesses are going to increasingly confront questions about force majeure and related contract concepts of impracticability of performance or frustration of purpose.
Force majeure comes from the French description for an event that cannot be anticipated or controlled. Your business likely has force majeure language in one or more important contracts. The purpose of a force majeure provision is to allocate risk of loss should performance become impracticable or impossible. There is no universally applied definition, but negotiated language typically speaks in terms of acts of nature (e.g., hurricanes, earthquake, floods), man-made circumstances (e.g., war, terrorism, riots, strikes), and catch-all provisions that may include other “natural disasters” or “acts of God.”
Importantly, many negotiated force majeure provisions require you to give notice to your counter party in order to invoke the protections. And, even if not stated expressly in the contract, most courts will imply a requirement that the condition, such as an epidemic/pandemic, actually caused the claimed inability to perform. If epidemic is not a specifically identified trigger (many force majeure provisions do so), in which case you need to rely on a catch-all such as other disaster or “act of God,” courts typically imply a condition that the circumstance was not actually foreseeable by the parties. For example, courts have said that a general economic downturn is a foreseeable event and therefore would not trigger force majeure relief.
The obvious question today is where you stand if epidemic is not an expressly stated in your contract as a condition excusing performance. Will it qualify as a man-made or natural disaster or “act of God?” It is unlikely that a virus credibly qualifies as “man-made” and natural disasters are almost universally identified as geologic (think earthquake) or weather related. There are, however, a very few cases from the last century suggesting that a viral epidemic would be an act of God, but only very scarce modern case law suggesting the same conclusion. There is certainly no universal recognition that an epidemic will be deemed an act of God. And although it seems intuitive to say that COVID-19 is truly an unforeseen economic disaster, it could just as easily be said that a dangerous virus is easily foreseeable, as would be the resulting economic downturn. There are also related common law and commercial code doctrines addressing impossibility or impracticability of performance and “frustration of purpose” beyond the scope of this alert, but the one thing that is known for certain is that these issues are going to play out many times in the courts in the coming months and years.
What To Do Now?
Check your contract language. If you have force majeure language (typically near the end of the agreement), there is a good chance that it may identify epidemic as a possibly excusing or delaying performance. If the language does not specify epidemic, there still may be catch-all language such as other “acts of God” that you can use to advance the argument, but existing authority on point is not highly developed. Further complicating that argument could be statements such as President Trump’s March 19, 2020 press conference in which he said specifically he did not believe COVID-19 was “an act of God.” An opposing party would certainly hold that up as an official governmental position. On the other end of the spectrum, China has been issuing certificates excusing contractual performance due to COVID-19.
Importantly, check to determine if you are required to give notice to the other party and follow the notice requirements to the letter. A counter party will exploit any failure to give proper notice as a reason to negate relief. It is equally important to determine if your contract requires you to mitigate damages, for example, by seeking alternate sources of supply or substitute markets for your products. Identify and then document how the epidemic makes it impracticable or impossible for your business to perform, other than just a general downturn in the economy. One possibility would be demonstrating that a supply chain or work force disruption due to government ordered curtailment or shutdown prevented the ability to perform. Also note that it is not uncommon that negotiated force majeure provisions in some sectors, such as commercial leases, will not excuse financial performance, meaning that even if your business is shuttered by government order, you would still have to make your lease payments. And finally, whether you have contractual force majeure protections or not, consider strongly reaching out directly to your counter party to explore negotiating for other relief while the world navigates these unprecedented events.
William K. Flynn is a Strauss Troy Shareholder who advises businesses on operations and commercial dispute resolution.