Some coronavirus-related events can release business contract signers from duties, but it's tricky
We all are painfully aware that the COVID-19 virus is a global public health crisis, thus far having caused hundreds of thousands of deaths across the world and resulting in approximately three million people becoming ill and suffering from symptoms.
Workers are contracting the virus across the globe making them unable to perform their jobs and resulting in a disruption of the supply chain. The pandemic is impacting U.S. and international businesses at an increasing velocity. Business owners are suddenly faced with decisions regarding slowing or shutting down factories and reevaluating dwindling supply chains.
Thus, business owners must carefully analyze whether COVID-19 may trigger the force majeure clause in their contracts.
A force majeure (French for “superior strength”) is an unforeseeable event that excuses a party's performance under the contract. The analysis of whether a force majeure clause may be employed to excuse contractual performance is based on these factors:
1. The event is included in the contract language.
2. It causes the inability to perform the contract obligation.
Force majeure clauses include a list of possible events that are considered unforeseeable by the contracting parties such as, for example, acts of God (such as earthquakes, floods, and windstorms), war, explosions, acts of terrorism, epidemics, pandemics, and government orders.
The first question is whether the occurrence is one of the events listed in the clause. Courts tend to interpret force majeure clauses narrowly so that only the events listed will be covered. For example, if a clause lists acts of terrorism as a force majeure event, a court may not excuse a party's performance based on threats of terrorism. A clause that includes pandemics, however, should be held to cover the COVID-19 outbreak.
When drafting a force majeure clause, it is important to specify all types of circumstances you anticipate could prevent or impede your performance under the contract.
Importantly, there must be a demonstrable cause and effect for the event to constitute a force majeure that excuses performance. It must be the proximate cause of the nonperformance. A force majeure clause may completely excuse performance or suspend performance for the duration of the effects of the event.
Assuming the COVID-19 pandemic is a listed force majeure event in a given contract, the next question is whether it acts to excuse or delay performance. If the COVID-19 pandemic is the reason for delayed performance or nonperformance, especially when due to governmental orders or other government action, force majeure clauses may excuse the delayed or non-performance.
The next question is what is the standard by which a party can claim its performance is delayed or excused?
Does the event, the pandemic or resulting government orders, make it inadvisable, commercially impracticable, illegal, or impossible?
It is important to carefully read and understand the force majeure clauses in your particular contracts.
It is imperative to keep in mind that a force majeure clause is not intended to buffer a party against the normal risks of a contract. For example, a normal risk of a fixed-price contract is that the market price will change. If it rises, the buyer gains at the expense of the seller and if it falls, the seller gains at the expense of the buyer. The fact that a company will lose money fulfilling its contractual obligations during the pandemic, standing alone, likely will be insufficient to trigger a force majeure clause.
Finally, if your contract does not include a force majeure clause, California Civil Code section 1511 may provide relief. This statute provides that, unless the parties have expressly agreed otherwise, performance is excused “when it is prevented or delayed by an irresistible, superhuman cause….”
Whether courts will categorize the COVID-19 pandemic as an irresistible, superhuman cause remains to be seen.
In the midst of the disruptions caused by this pandemic, unprecedented in our lifetimes, and the untested legal waters, it is important to reach out to your contractual parties to attempt to negotiate necessary adjustments to performance and to diffuse potential disputes.
It also is important to assess legal risks and take steps to preserve legal rights to mitigate those risks. Both of these can be accomplished without losing sight of our humanity and sensitivity to this situation we all find ourselves in as a collective society.