- Erika Johnsen, Mike Thal and Bill Klain
Force Majeure: What Do You Do When a Disaster Interferes with Your Contract?
As you work your way through the recent economic downturn and rebound, you may have concerns about meeting your contractual obligations or enforcing the obligations that other parties owe to you. In adapting your business practices to comply with CDC guidelines and the Governor's orders, it is critical that you understand the provisions of your contracts and the steps you can take to protect yourself and your business.
CHECK YOUR CONTRACTS
Does your contract contain force majeure, "Act of God," or other disaster- or delay-related provisions?
If "force majeure" (or "superior force") is an unfamiliar term for you, you are not alone. It is a common, boilerplate element of many business contracts - so common, and so seldom invoked, that contracting parties and their attorneys have rarely bothered to acknowledge it, much less negotiate its finer points.
That is likely to change.
Per Black's Law Dictionary, a force majeure provision allocates "the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled."
The degree of force majeure protection varies with the language of the contract, and with the state under whose laws the contract is to be enforced. Courts have historically interpreted force majeure provisions narrowly, excusing contractual performance only when unexpected and unforeseeable events make performance truly impossible or pointless.
For example, many courts ruled that the 2008 economic downturn was not a force majeure because, generally speaking, a recession is an economic reality that parties can acknowledge and bargain around when forming their contracts.
In contrast, it is conceivable that a court would find that the coronavirus's specific impact - employee absences, supply-chain disruption, reduced productivity, etc. - generally meets force majeure's textbook definition, without being persuaded by the pandemic's general impact on customer demand or the general state of the economy.
Be advised, though, that courts have narrowly construed force majeure clauses, with close attention to the unique circumstances of the dispute and the precise language of the contract. Some legal observers have speculated that, if a clause does not reference a pandemic, disease, quarantine, etc., it may not be found to apply to the current situation.
Does your clause kick in if performance is "impossible" (meaning precisely that), or just "impracticable" (meaning that the burden would make it unreasonable to move forward with the contract)? Or can a party be excused from its contractual obligations if its performance is merely "substantially hindered" by the prevailing conditions?
Does your contract provide for a remedy in the face of such an event? Courts have often held that, when a force majeure situation is temporary, contractual performance is suspended only for the duration rather than canceled altogether. However, your contract may explicitly spell out what remedies are available. It may also provide that some aspect of your performance, but not others, is excused or suspended.
Does your contract contain requirements for taking advantage of the force majeure provision? For example, you may need to provide written notice to the other party within a certain timeframe, detailing how and why you intend to modify your performance.
Are there ways you can mitigate your damages? Can you keep your business operational on a limited basis, have employees work remotely, or make a claim under a business disruption insurance policy? The duty to make serious efforts to mitigate your damages pervades all of contract law, and force majeure situations are no different.
Alternatively, does your contract contain a "hell or high water" provision that commands performance regardless of the circumstances? Even if it does contain such a provision, you may have other options available.
OTHER LEGAL EXCUSES FOR FAILURE TO PERFORM
Even if your contract is silent on the parties' rights and obligations in times of crisis, various affirmative defenses may be available to you, such as commercial impracticability or frustration of purpose due to supervening governmental acts. (Note that these are usually available only if your performance has been rendered futile or impossible, not merely difficult or inconvenient.)
For example, if your business was forced to stop operating because your industry was not included in the Executive Order's list of essential businesses, you may have a valid legal excuse for a failure to perform. (We emphasize "may" because, in light of the financial relief efforts that the federal government extended to businesses via the CARES Act, Paycheck Protection Program, et al., even a business that had to shut down may have to show that it earnestly sought financial relief and that the relief was insufficient to meet its needs and support its obligations.)
Federal assistance aside, courts have generally held that it is against public policy to require a party to continue to attempt performance when a subsequent government regulation or ordinance has made that performance illegal or practically impossible. However, again, in the case of the COVID-19 pandemic, it may be that performance is only temporarily suspended rather than fully excused.
WHAT YOU CAN DO NOW TO PREVENT OR MITIGATE DAMAGES
Communicate. Depending on the specifics of your contract, you may want to provide written notices of expected delays or difficulties and propose contractual addendums for extended project schedules and the resulting increased costs. You should be prepared to prove a clear cause-and-effect connection between the pandemic and your grounds for setting aside your contract.
Document. The steps your business is taking to comply with health authorities' guidelines, worker productivity, revenue, and material and labor shortages may later become evidence of the efforts you made to mitigate your damages, or why your performance became impracticable.
Draft. Depending on how COVID-19 plays out, courts may be even less likely in the future to classify events like a pandemic as unforeseeable events that suspend or excuse performance. Going forward, draft your contracts with provisions that make arrangements for these types of disruptive events.
Negotiate. Due to court closures and related litigation delays, both parties may be better off renegotiating their contracts rather than going to war.
Ask for Help. It is safe to assume that the impact of the coronavirus will trigger hundreds of lawsuits, and how the courts treat this wave of litigation is likely to evolve dramatically over the coming months and years. Your Lang & Klain attorney can help you navigate all of the above, based on what is known at any given point, and position your business to move forward.