By: Sean Valle
The spread of coronavirus and COVID-19 continues to shape interpersonal and business interaction, and it is unclear how substantially the pandemic will impact economic ecosystems and individual businesses. At some point, however, every business is likely to feel an effect. Now that many organizations have cancelled or postponed events and other in-person activities, businesses have been forced to close, and millions of Americans are unemployed, disruptions in contracts are inevitable. At Fourscore, our clients have reported issues related to the following types of contracts:
- Commercial leases
- Bank loans and other debt
- Service agreements
- Supply agreements
A potential consequence of COVID-related regulations is that one or more parties to a contract might be unable to satisfy their contractual obligations. This raises an unusual question: can the coronavirus affect my contract?
So rises the Force Majeure clause.
The answer, of course, is not straightforward. Force Majeure (Latin for “superior force”) is often included in business contracts and other agreements in order to provide the parties leeway when the contract becomes impossible, impractical, or difficult to perform due to events outside a party’s control. As detailed in a previous Fourscore article, these provisions are often present but rarely applicable.
Force Majeure clauses are included in many contracts, including those related to product development and shipping, software services, event space rental, sponsorships, and even collective bargaining agreements between professional sports leagues and their respective player’s associations. A Force Majeure clause might even affect whether the National Basketball Association is required to pay its players later this year depending on the economic impact of the NBA’s decision to postpone its current season.
A Force Majeure clause might read like the following example:
For purposes of this Agreement, “Force Majeure” means, without limitation, any acts of God, government, war, terrorism, riot, fire, floods, earthquakes, explosions, strikes, lockouts, cessation of labor, trade disputes, breakdowns, accidents of any kind or any other causes which are beyond the reasonable control of a party. Neither party shall be liable to the other party or be deemed in breach of this Agreement by reason of delay or failure to perform if such delay or failure to perform was caused by Force Majeure. In the event of a Force Majeure: (i) the party claiming Force Majeure shall, as soon as commercially practicable, notify the other party of such Force Majeure event provided the notifying party shall incur no liability for its failure to give such notice; (ii) the notifying party’s duty to perform shall be suspended for the duration of the Force Majeure event; and (iii) the time of performance for the party impacted by the Force Majeure event shall be extended by a period equal to the duration of said Force Majeure event.
In the above example, there are a few important items to note:
- Although specific types of events are explicitly considered “Force Majeure”, the definition is not limited to those events. This means that additional, unlisted events “beyond the reasonable control of a party” could constitute a Force Majeure. This broad language is common for many agreements containing Force Majeure clauses.
- The Force Majeure must actually cause the party’s inability to timely perform its obligations. So, the spread of coronavirus would not relieve a party of its responsibilities if performance of the contract was not reasonably affected by coronavirus.
- If a party intends to utilize the Force Majeure clause to suspend its performance under the contract, it must notify the other party as soon as possible.
- A Force Majeure doesn’t completely kill the contract. Rather, it suspends a party’s obligation to perform during the Force Majeure event. Once the Force Majeure event ends, the party must resume performing its obligations.
To determine whether an event constitutes a Force Majeure, courts will often apply an objective test to determine if the event falls within the terms of the contract. Most courts do not require that the type of event at issue is expressly listed in the contract, provided that, from an objective assessment, the event seems to be outside of the reasonable control of the party trying to utilizing the Force Majeure clause. How broadly or narrowly a court reads a Force Majeure provision depends on the state law applicable to the contract. For example, Delaware, North Carolina, and New York courts often take a somewhat tailored approach to Force Majeure enforcement, preferring to stick to the scope of language included in the contract. However, if the contract includes broad language, like that of the agreement above, a court will have to take a more active approach in determining whether a Force Majeure event exists.
Some Force Majeure clauses will also carve out specific events or situations that do not constitute Force Majeure. In these situations, the occurrence of such an excluded event would not allow a party to suspend or avoid its performance obligations. These carve-outs are common in commercial contracts where the occurrence of a Force Majeure event is generally considered a risk of doing business in that market.
Force Majeure clauses can be detailed, but they can be enforceable even without extensive detail. The collective bargaining agreement between the NBA and the National Basketball Players’ Association is so thorough that its Force Majeure provision likely allows the NBA to withhold players’ pay due to an “epidemic.” Few contracts will be so specific, but, even if a contract does not expressly list an epidemic as a Force Majeure event, the coronavirus outbreak might still constitute such an event in certain circumstances. Whether and to what extent the coronavirus outbreak affects your contract depends on the Force Majeure language included in your agreement as well as the extent to which the coronavirus pandemic truly affects each party’s performance under your agreement.
If your contract does not include a Force Majeure clause, you still have options. There are two legal doctrines that extend protections similar to the concept of Force Majeure to situations where a contract does not expressly address unforeseen situations: the doctrine of impossibility/impracticability and the doctrine of frustration of purpose.
The doctrine of impossibility/impracticability allows one party to terminate or suspend its obligations where performance under the contract has become impossible or impracticable. For example, imagine that you lease a storefront to operate a business. Halfway through your lease, the storefront is destroyed in a storm. A court might allow you to terminate the second half of your lease since it’s impossible for you to operate a business out of the destroyed space.
Frustration of purpose is applicable where it is still technically possible for a party to perform its obligations under a contract but doing so would be inconsistent with the original purpose of the contract. To modify our previous example, imagine that you leased your store specifically to sell paper towels (and your landlord knew this). Halfway through the lease, the world runs out of paper towels. A court might allow you to terminate the second half of your lease since leasing the space no longer aligns with the original purpose of doing so.
Remember that the doctrines of impracticability and frustration of purpose are only applicable if your contract does not include a Force Majeure clause.
If your business or another business is unable to perform its obligations under a contract due to the coronavirus outbreak, consider the following:
- Check if your contract has a Force Majeure clause. What specific events are considered Force Majeure events?
- Talk to your attorney about the language of your Force Majeure clause and/or your options generally.
- Communicate clearly and early with the other party. As noted in the example language above, the party claiming Force Majeure can do so only if it promptly notifies the other party of the Force Majeure event.
- If your business is in a state that has declared a state of emergency, consider sending a notice to your contacts that outlines any precautionary measures you’re taking and outlines how your operations may change until the threat is lifted.
- Be willing to negotiate a cordial arrangement with the other party to your contract. Remember that litigation can be incredibly expensive and time consuming. Additionally, backing out of a contract and disputing arrangements with other businesses can threaten your business’s reputation. If any party needs to suspend or cancel the performance of a contract, the goal should always be to reach mutual agreement in a manner and on terms that are acceptable to everyone involved—even if they are not ideal.
If you have any questions about the application or scope of Force Majeure to your contract, please contact the lawyers at Fourscore Business Law.
Headquartered in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in the Triangle, the Southeast and the Bay Area. We also represent venture capital funds and other investors who invest in companies located in New York, Silicon Valley and everywhere between. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.