Following the rapid spread of the novel Coronavirus (COVID-19) first reported in Wuhan, China at the end of 2019, the World Health Organization declared COVID-19 to be a pandemic on March 11, 2020.
With the Coronavirus (COVID-19) global pandemic, businesses face extraordinary circumstances (often for the first time in their history). A frequent question: whether the pandemic may excuse or delay their obligations to perform under existing contracts (including commercial leases) due to the occurrence of a force majeure event.
What is Force Majeure?
Here’s a too-simple definition of the French-derived term:
1 : superior or irresistible force
2 : an event or effect that cannot be reasonably anticipated or controlled (compare “act of God”)
During contract negotiations, force majeure clauses are often pejoratively treated as “boilerplate” and glossed over. In contrast to careful review of insurance-related provisions (e.g., coverages, releases, indemnities), force majeure risks are inadvertently assumed or overlooked.
Force majeure is a contract defense that allows a party to suspend or discontinue performance under certain circumstances. It may limit a party’s liability.
Force majeure is determined on a case-by-case basis. It depends on the specific contract terms, which law applies, and relevant facts.
When a party cannot perform its obligations under a contract because of an “act of God” or other unforeseen circumstance, the “act of God does not relieve the parties of their [contractual] obligations unless the parties expressly provided otherwise.” GT & MC, Inc. v. Texas City Ref., Inc., 822 S.W.2d 252, 259 (Tex. App.—Houston [1st Dist.] 1991, writ denied); see also Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902, 519 N.E.2d 295 (NY 1987). However, where the parties include a force majeure clause in the contract—a provision which allocates risk of non-performance in circumstances beyond the parties’ control—such “acts of God” or other circumstance may excuse performance.
Courts typically construe force majeure clauses narrowly. Therefore, whether disruption based on a pandemic like COVID-19 can excuse performance will depend on the language of the particular force majeure clause.
Many force majeure provisions identify specific events which are (i) not “reasonably foreseeable” and/or (ii) beyond the parties’ control.
Here’s an easy case: COVID-19 will likely count as a force majeure event if the provision expressly refers to a “pandemic,” “epidemic” and/or “disease.”
However, if the pertinent force majeure provision lacks such specific disease references, other generic “catch-all” terms may instead be the focus:
- acts of god
- labor shortages
- national emergencies
- government regulations
- acts beyond the [reasonable] control of the parties
In the construction industry, American Institute of Architects (AIA) contracts are ubiquitous. Here’s the pertinent force majeure language from one of the AIA foundations documents, the AIA A201-2017 (General Conditions of the Contract for Construction):
8.3 Delays and Extensions of Time
8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by
(1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor;
(2) by changes ordered in the Work;
(3) by labor disputes, fire, unusual delay in delivery, unavoidable casualties, adverse weather conditions documented in accordance with Section 22.214.171.124, or other causes beyond the Contractor’s control;
(4) by delay authorized by the Owner pending mediation and binding dispute resolution; or
(5) or by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.
You can immediately discern questions and ambiguities. Did Coronavirus cause ‘unusual delay in delivery’? Are the causes ‘beyond Contractor’s control’? Will the architect determine that the delay is ‘justified’?
- How does COVID-19 affect my contracts?
- COVID-19 first appeared in Wuhan, China, in late 2019. Just a few months later, the World Health Organization and Center for Disease Control declared it a global pandemic that raised “a public health emergency of international concern.”
- With the lockdowns, shutdowns, closures, and cancellations, many businesses simply cannot perform their contractual obligations. Some assert force majeure to eliminate or limit liability due to their inability to perform. Others canceled various contracts for goods and services due travel restrictions and other limitations.
- What force majeure events qualify? This is highly fact-specific.
- outside the party’s reasonable control;
- not reasonably foreseeable by the parties, and therefore the consequences could not be avoided;
- materially affects a party’s ability to perform contractual obligations; and
- the party took all reasonable steps to try to provide notice and to avoid or mitigate the relevant event or its consequences.
Important: force majeure provisions apply when performance becomes impossible — not merely because performance is burdensome.
- How to show that Coronvirus had a “material impact”?
- Again, the impact or impairment depends on each situation’s specific facts and circumstances of each situation.
- A contracting party asserting force majeure must establish a causal link between the relevant event and the party’s inability to perform. For example, the current and evolving restrictions designed to prevent the spread of COVID-19 may make it impossible to timely perform under the contract.
- The contract will dictate the circumstances under which performance will be excused (g., if a party’s performance is “impeded,” “hindered,” “prevented” or “interfered with”).
Important to Note:
- A disruption that affects only the contract’s profitability may not be sufficient to constitute a force majeure event unless there is express language addressing profitability.
- An economic downturn or generally adverse business conditions are probably insufficient to constitute a force majeure event, even if it can be proven that such downturn was specifically caused by COVID-19.
To rely upon force majeure, the affected party must usually notify the other party, with supporting evidence. The contract may require specifying anticipated consequences and duration of the force majeure event. Some contracts, especially construction contracts, include a “time-bar” clause which requires notice within a specified period from when the force majeure event first occurred; otherwise, the claim will be lost.
Unlike a one-off event such as natural disaster (usually limited in time and confined to a particular geographical locale), the COVID-19 outbreak has been dynamic. It spread rapidly and unexpectedly across many countries and regions. Some parties are issuing “defensive” or “rolling” force majeure notices which take into account the developing impact of the COVID-19 outbreak upon their contractual obligations.
Was COVID-19 Foreseeable?
This will be the subject of vigorous debate. Some commentators consider a pandemic to be inevitable but unpredictable, qualifying as a classic force majeure event. However, others argue that after the SARS outbreak in 2005, epidemics and diseases are now foreseeable and should be contemplated in the parties’ contract.
If the party executed its contract before Coronavirus spread and classified as a pandemic, that party will more successfully rely on a force majeure clause.
However, where parties reasonably knew of the virus’s potential consequences but entered into contracts anyhow (e.g., after January of 2020, when the virus began attracting attention in China), their foreseeability argument will be more challenging.
Whether courts ultimately determine that COVID-19 is an “act of God” and/or was “foreseeable” remains open. We are in uncharted terrain. Litigation will likely proliferate for years.
Other Grounds to Excuse Performance
Besides common law doctrines, §2-615 of the Uniform Commercial Code similarly excuses performance where it has been made “impracticable” by the occurrence of an event, “the non-occurrence of which was a basic assumption on which the contract was made.” Colo. Rev. Stat. §4-2-615.
Likewise, certain international contracts may be governed by the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). Article 79 of the CISG excuses performance when “the failure was due to an impediment beyond [its] control and that [it] could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”
Duty to Mitigate Damages
Finally, a party relying upon force majeure must usually show that it took reasonable steps to avoid or mitigate the event and its consequence, and that there are no alternate means for performing under the contract. “Reasonable mitigation” is again fact-specific and depends upon the nature and subject matter of the contract.
For example, a supplier could consider using alternative manufacturing lines in a different location, or a project owner could seek alternative suppliers. However, the reasonableness of mitigation will be considered in light of any additional burdens and costs the party incurs, as well as available alternative manufacturers and suppliers at that time, and the overall impact of any delays that a mitigation measure could have upon the project schedule.
Given the continued impact which COVID-19’s spread has upon businesses, there may be fewer mitigation measures available to parties than in other force majeure scenarios.
Is Your Business Affected by COVID-19? We Can Help
If your business suffers due to Coronavirus’s devastating impacts, don’t delay. Relentless demands, late deliveries, missed payments, and non-performance present overwhelming and confusing issues. Trust the experienced, caring professionals at 180 Law Co.