COVID-19 and Force Majeure Clauses
The response to the COVID-19 pandemic is unprecedented—worldwide, governments have shut down businesses across the board, often with catastrophic consequences for those affected by such orders.
Many contracts have force majeure clauses, sometimes referred to as “Acts of God” clauses, (especially since 9/11) that relieve a party of contract obligations for disasters beyond the control of the parties. Because there is rarely a need for someone to declare a force majeure, these clauses are seldom scrutinized or specifically discussed during contract negotiations. Further, most such clauses do not include the words “pandemic” or “epidemic,” but they frequently refer to acts of governmental authority. The question in these times is does the force majeure clause apply when a business is ordered closed because of quarantine or otherwise, as we are experiencing today. The answer is—maybe. It will depend closely on the unique facts and the way the clause is written. Since relief from contract obligations—such as commercial rent for a brick and mortar retailer forced to close doors due to COVID-19—can be a life and death issue for many business owners, the answer matters. Also, because many force majeure clauses require written notice from the party seeking the protections of the clause, time is of the essence.
Even if a force majeure clause may not strictly apply, contract law also recognizes the doctrine of “frustration of purpose” for events that substantially frustrate the contract. For example, in one case a hotel that purchased advertising in an international yacht club race program refused to pay when the race was cancelled due to outbreak of war, even though the publisher had printed the programs. The court agreed to release the hotel from the contract because its purpose was frustrated by cancellation of the event. Impossibility of performance through no fault of one of the parties is a related doctrine – a change of circumstance that makes the contract literally impossible to perform (such as a venue burning down), which has morphed in modern times to commercial “impracticability.” Performance can be impracticable, though not literally impossible, because it is very difficult or no longer has commercial feasibility. Factors to consider are unforeseeability, and whether there is an event that was not contemplated by the parties and also not caused by the parties.
There are more questions than answers as to how these doctrines will apply to the consequences of government-ordered business closures. Judges certainly could apply these doctrines to provide relief in the current crisis, but they may also be concerned about huge domino affects across the economy. Another factor is whether a party has received government relief from the Payroll Protection Program or some other government program, so double relief may not be justified.
No one size analysis fits all. Each contract must be examined in light of government mandates and restrictions—sometimes they are overlapping—that affected a particular business. There are many unknowns, particularly the length of these restrictions and whether a business, such as a restaurant, is permitted to operate in a limited fashion even if table service is now banned. But what we do know is that you will have no idea unless you start assessing these issues and your possible options.
If you do not want to just wait and see and are looking for some initial advice, we can help. Let us review your contract and your unique factual circumstances. We are flexible and available to advise you in this time of crisis. If you have to engage in negotiation and even litigation, we can also be here for you.