We have been receiving numerous questions from service providers and business owners who are rightfully concerned about their contractual obligations during these difficult times. While every situation is different, and we encourage you to carefully review the language in your contracts, we want to share some information on two legal doctrines that are particularly relevant at this time.
If you have a written contract, it is likely to include a force majeure clause. A force majeure clause, commonly referred to as the “acts of God” clause, has the power to free parties from liability or obligations when an unforeseeable and extraordinary event occurs that prevents one or both parties from satisfying their end of the contract. In most cases, however, this clause does not excuse the parties entirely. Rather, the clause typically only suspends performance for the duration of the extraordinary event or circumstance.
When looking to invoke the force majeure clause there are three things you want to consider:
Most force majeure clauses stipulate what the parties’ obligations are in the event of more commonly foreseeable events such as war, acts of terrorism, fire, hurricane, and strikes. But what about a pandemic virus? Historically, the courts have interpreted force majeure clauses narrowly, meaning the clause will only apply if it specifically includes the event that actually prevents a party’s performance. Does this mean that your contract needs to explicitly reference COVID-19? No, but the contract would likely have to reference something akin to “outbreak of disease,” or “epidemic,” for the current situation to excuse performance.
Additionally, a phrase like “acts of Government” may also excuse performance under a contract given the Government’s declaration of an official State of Emergency, and their implementation of more significant personal restrictions such as curfews, social distancing, and forced closure of many public spaces.
While many contracts include language such as “acts of God” and “circumstances beyond the parties’ control,” it is questionable whether such language could be used to excuse performance due to Coronavirus. In determining whether an event qualifies as an “act of God” or “beyond the parties’ control,” courts have looked at human agency, i.e. whether it was caused by humans or nature. Here, there may be arguments on both sides as to whether Coronavirus and its spread qualifies. This is a novel issue – the closest comparison is the 1918 Spanish Flu – and the courts will soon be tasked with deciding. Until that time, consult with your attorney as to whether your contract provides you with ample leverage to meet your immediate goals.
In the event that your contract does not have a force majeure clause, or the clause is weak, you may still be able to invoke the common law doctrine of Impossibility of Performance (DIP). However, DIP is similar to force majeure in that the Courts apply the principle narrowly. A party’s performance will usually only be excused when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Some common examples include:
It is obviously too soon to know how courts will consider the Coronavirus’ impact on contracts, but this will likely be seen as an unanticipated event that could not have been foreseen or guarded against. That said, economic hardship, even to the point of bankruptcy, is not covered by DIP, and a party is obligated to perform so long as it is possible to do so. A party may be successful in invoking the DIP due to Coronavirus if the United States or other countries continue to pass laws restricting travel, blocking the shipment of goods, or quarantining citizens. Each scenario must be evaluated on a case-by-case basis. Other common law excuses that may apply are the Docrines of Impracticability and Frustration of Purpose.
The bottom line: we don’t know how far-reaching the virus’ effects will be or how the Courts will handle issues surrounding the virus and contract performance. For now, you should carefully review your agreements and see what protections are currently in place.