What to Do if You Cannot Meet Your Contractual Obligations Due to COVID-19 Pandemic
Given the Coronavirus disease 2019 (COVID-19) pandemic and its impacts on businesses and the economy generally, many businesses are currently unable -- or may eventually become unable -- to perform contractual obligations. Force majeure is a little-known clause in many contracts that excuses parties to a contract for not performing their obligations in the event of a circumstance beyond their control. Parties should review existing contracts to see if there is a force majeure clause and determine whether COVID-19 is a force majeure event.
What is a Force Majeure Clause and What Does it Do?
Force majeure is a boilerplate clause in many contracts that allows a party to suspend or excuse its performance obligations, without being liable for breach of the contract, when the party cannot perform due to a force majeure event. A force majeure event is generally defined as an event or condition not existing at the time the contract was signed and that was not reasonably foreseeable at such time. These include events such as wars, civil unrest, revolutions, riots, acts of terrorism, strikes, fire, flood, hurricane, typhoon, earthquake, lightning, explosion, acts of state or government action prohibiting or impeding any party from performing its respective obligations.
Force majeure is a boilerplate clause in many contracts that allows a party to suspend or excuse its performance obligations, without being liable for breach of the contract, when the party cannot perform due to a force majeure event.
It is important to keep in mind that courts will only allow a party to a contract to use force majeure as an excuse from performing its obligations in narrow circumstances. For example, a party will not be excused from its contract obligations if performance is merely difficult. Rather, performance must be impossible due to the occurrence of the force majeure event. Similarly, any act of negligence or wrongdoing by a party that affects its ability to perform its obligations would not be considered a force majeure event.
A well-drafted force majeure clause should be customized to fit the parties to the contract, the types of goods or services, and the particular industry. The clause should include, at a minimum, the following:
- A definition of what constitutes a force majeure event.
- What happens when such an event occurs.
- Which party can suspend performance and for how long.
- What happens if the event continues indefinitely or beyond a certain amount of time (for example, can the other party terminate the contract).
Can a Force Majeure Clause Be Used with the COVID-19 Pandemic?
Courts typically look to the language of the contract to determine whether a particular event will excuse the parties’ obligations. In certain cases, the contract explicitly lists pandemics or quarantines as force majeure events. In those cases, it is very likely that the inability of the parties to perform under the contract due to the COVID-19 pandemic would be excused. Similarly, many force majeure clauses cover an “action” or “order” by the government, which would likely include a government mandated lockdown such as the current “Shelter-in-Place” order mandated by the City of San Francisco and other cities across the U.S. In addition, many contracts include a general catchall reference to any “circumstance beyond the control of the parties.” A party that is currently unable to perform its contractual obligations due to COVID-19 could argue that COVID-19 fits the catchall language, although courts will likely have a more difficult time accepting that argument compared to a contract that makes explicit mention of pandemics.
a party will not be excused from its contract obligations if performance is merely difficult. Rather, performance must be impossible due to the occurrence of the force majeure event.
The question of whether the clause can be used by a party to suspend or excuse its performance obligations due to COVID-19 will depend on the exact contract language and the law governing the contract, and will likely play out in courts in the coming months. You should consult with a business attorney to find out if your startup may be able to rely on COVID-19 to seek temporary relief from its contractual obligations.
What If Your Contract Doesn’t Have a Force Majeure Clause?
Consider Alternative Legal Defenses
If your startup’s contract does not include a force majeure clause, the list of events do not include pandemics or disease related disruptions, or you cannot point to an official government action or order, there may still be other ways to terminate performance obligations. Some common law defenses to the enforcement of contractual performance may still apply to COVID-19, even absent a force majeure clause. For example, courts may excuse a party’s obligation to perform under a contract based upon the legal theories of impossibility, impracticability and frustration of purpose. Similar to a force majeure clause in a contract, these applies where a party’s performance under the contract is made impossible or impracticable due to an unforeseen circumstance, or when an unforeseen event undermines a party’s principal purpose for entering into a contract in the first place. However, these defenses are applied very narrowly by the courts. Any party asking a court to apply these principles will have a high burden to prove that they apply in the context of the COVID-19 pandemic.
Communicate With Your Counter-party
Additionally, contract law allows a party to a contract to voluntarily waive a performance obligation of the other party given the unprecedented and global nature of COVID-19 and in the interest of preserving business relationships. A waiver clause in a contract typically allows parties to waive performance on an as-needed basis without giving up the right to enforce such performance in the future. With that in mind, you may consider communicating any inabilities to perform your contractual obligations to the other party as soon as possible in hopes that they are willing to waive a specific obligation.
Check Your Insurance Policies
Finally, some business interruption insurance policies may cover a pandemic such as COVID-19. While some policies may exclude pandemics from coverage, it is worth reaching out to your insurance carrier to find out if you are covered.
DISCLAIMER: The information in this article is provided for informational purposes only and should not be construed or relied upon as legal advice. This article may constitute attorney advertising under applicable state laws.
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