The current COVID-19 pandemic is disrupting U.S. businesses as well as global supply chains, and with so many parts, supplies, and materials coming from overseas, businesses in the US are finding it difficult to meet their contractual obligations. Aside from the production of goods, service-oriented businesses are also finding themselves unable to fulfill their contractual obligations as a result of stay-at-home directives. When happens when your business can’t deliver? What happens when your vendors still demand payment?
The force majeure clause of a contract may provide some relief. From the French for “great strength” or “major force,” this clause refers to extraordinary events that prevent a party from meeting the terms of a contract. Force majeure clauses can serve as a defense for a party’s failure to meet its contractual obligations, allowing the party to be excused of its responsibility and therefore liability.
Force majeure clauses usually spell out the extraordinary events they apply to, such as war, terrorism, acts of God, labor strikes, or any variety of other “major” phenomena beyond a party’s control. In light of the current pandemic and related stay-at-home orders, some businesses may be able to rely on the force majeure clause of their contracts to excuse their non-performance. It will be important to review whether “pandemic” is specifically identified in the contract. Force majeure clauses are often overlooked and sometimes not even included in contracts. If included, they are generally located towards the end of a contract along with other boilerplate language.
Even if “pandemic” is not specifically identified in the contract, some businesses may be able to argue that a global viral pandemic qualifies as an “act of God.” Alternatively, they might rely on language in the clause referencing “government orders” or catch-all language addressing “impossibility” or “forces beyond the party’s control.” In considering the applicability of a force majeure clause, courts look to whether: (1) the event qualifies as force majeure under the contract, (2) the risk of non-performance was foreseeable and able to be mitigated, and (3) performance of the contract is truly impossible.
If your agreement lacks a force majeure clause, all hope is not lost. You may still be able to excuse non-performance through the common law doctrines of impossibility. To succeed on a defense of impossibility, a party generally must establish that: (1) an unexpected intervening event occurred, (2) the parties’ agreement assumed such an event would not occur, and (3) the unexpected event made contractual performance impossible or impracticable.
Another common law defense which can be asserted to excuse non-performance is “frustration of purpose.” To show frustration of purpose, a party must establish (1) an event substantially frustrates a party’s principal purpose, (2) the non-occurrence of the event was a basic assumption of the contract, and (3) the event was not the fault of the party asserting the defense.
If you are concerned about breaching a contract as a result of COVID-19, seek the counsel of a knowledgeable employment and business attorney who can review your agreement and inform you of your legal options.