COVID-19 and Contracts: The Impact of Force Majeure Clauses
By ContractsCounsel March 27, 2020 Reading Time: 5 minutes
The law is evolving whether companies can invoke a force majeure clause concerning COVID-19.
The law is very fact-sensitive, case-sensitive, and turns on state-law precedent.
Consult an attorney whether to invoke a force majeure clause if you need to break a contract, and consult an attorney whether it is worth pursuing a judgment against a party that invokes the same.
COVID-19 and Contracts
Most seasoned attorneys – and business owners – recognize that all contracts contain certain “boilerplate” language toward the end of the document. These repetitive clauses, in various degrees of legalese, address jurisdiction, amendments, and, of increasing curiosity these days, how the parties should proceed in the event where performance is presumably impossible.
These force majeure clauses (find pronunciation here) are easy to implement when there is a natural disaster where the impact is visible and real: earthquakes, hurricanes, strikes, and changes in laws making fulling the contract illegal. It is more difficult to assess whether an invisible pandemic is equally a trigger. Force majeure means “a superior force,” and in the legal definition sense, it seeks to void legal liability in the event of a catastrophe. Many business owners are wondering if this clause waives payment obligations, insurance policies or other issues that may be governed by contracts.
ContractsCounsel understands that you may be concerned to what extent force majeure clauses impact your contracts, whether you’re trying to keep them in tact or trying to break them without penalty. As COVID-19 spreads across the country so too are business owners looking to the judicial system to learn to what extent this pandemic relieves them of or enforces their contractual duties in regards to payment obligations, insurance policies, etc. But here’s what we know now.
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As a first step, review the language in your contract. Most force majeure clauses include certain examples of what constitutes a triggering event, such as an Act of God, terrorism, and war. This is what’s called a “closed list,” and follows a well-established legal precedent and case law that the inclusion of one thing excludes all others. Courts construe them narrowly. In other words, for COVID-19 to be applicable, the force majeure clause must contain words like quarantine, lockdown, epidemic, or pandemic.
One possible work-around situation is if the force majeure clause references government action. If your place of business is located in a state or county where the government mandated that the business shut down, then it is likely that COVID-19 would be included because it would be unlawful for you to continue to engage in commerce, thereby making performance impossible.
Each state is different.
Contracts are generally governed by common law and state law. Each state has precedent and case law to what extent a certain event might invoke a force majeure clause. For example, in Texas, a party invoking this clause is under no obligation to try to mitigate its failure to perform to overcome the act that triggered the clause. To put it another way, a small business need not try to “fix” their business model to accommodate a catastrophic event. The opposite is true in New York where the breaching party must show an attempt to perform under the contract in spite of the event.
Erroneously invoking force majeure clauses.
If a court finds that a party erroneously invoked a force majeure clause and ceased performing under the contract that party might be in breach and subject to money damages or specific performance. Caution and counsel are advised.
Caution is also advised for the non-breaching party in seeking a judicial remedy. In these times of uncertainty, many small businesses might be forced to close their doors permanently, making them effectively judgment-proof. Even if the winning party is correct that their counterpart erroneously invoked this clause, an order awarding monetary relief might only be worth as much as the paper it’s printed on.
The law is evolving, but at present it appears that a business claiming that COVID-19 falls under a force majeure clause will likely have a strong argument based on precedent and case law because of the unforeseen nature of event. Nevertheless, whether there was an attempt to continue to perform under the contract (such as conducting work remotely) and whether that is even a requirement under the contract must be evaluated on a case-by-case basis.
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.