Contract Nonperformance: Is Coronavirus a Force Majeure Event?
The severity of the coronavirus event is evolving, but its impact has already been one of global proportions. As officials grapple with a public health crisis, and financial regulators work to find solid footing amid a falling market, businesses across the U.S. and abroad now face uncertain futures.
For many companies, that may very well include nonperformance of contracts.
Force Majeure & Coronavirus: Contract Clauses May Alleviate COVID-19 Losses
From event postponements, cost overruns, and project delays to facility closures, travel and transportation cancellations, and stagnant supply chains, the full scope of losses arising from COVID-19 still remains to be seen. However, many industries feeling the immediate effects of the coronavirus are already anticipating potential for litigation over delays, breach of contract, and liquidated damages.
Who bears risk and loss for delays, increased costs, and other losses caused by the coronavirus is a fact-specific question, and a matter that will depend largely on the controlling written contract – most specifically, whether the virus constitutes an excusable nonperformance under a contract’s force majeure clause. By definition:
- A force majeure is an event or effect which cannot be anticipated or controlled. It may include both “acts of nature” (i.e. floods, earthquakes, tornadoes) and “acts of people (i.e. riots, wars, strikes).
As a contractual provision, a force majeure clause may excuse contract nonperformance. Depending on the details of a contract, it may relieve performance of a contractual obligations for the duration and to the extent it is affected, justify extensions of time to perform, allow for a recovery of financial compensation for related costs, and assist in defending against claims for damages.
Force Majeure Criteria
While the specific facts and language contained in a contract matter, there are some general criteria that must be met for an affected party to have a viable force majeure claim. This includes proving:
- The event hindered, delayed, or prevented performance of the contract; and
- The affected party took all reasonable steps to mitigate or avoid the event or its effects.
What Qualifies as a Force Majeure Event?
Although the World Health Organization (WHO) declared the COVID-19 outbreak a global pandemic on March 11, and while many contractors and companies are unable to perform at no fault of their own, determining whether COVID-19 is a force majeure event still ultimately depends on the specific language a contract uses to define a force majeure event. Why?
- If a force majeure clause doesn’t include epidemic or another term that might encompass the COVID-19 crisis, it may not trigger protection.
- If a force majeure doesn’t exist, affected parties may not have cause for action apart from common law claims of impossibility, which are limited and narrowed (requiring literal impossibility), and potentially not able to excuse nonperformance due to COVID-19’s arguable status as an “act of God.” Other common law claims, such as commercial impracticability or frustration of purpose, also have limitations.
A force majeure provision is a creature of contract rather than law. Although commonly viewed as boilerplate language that typically does not evolve until major events – like COVID-19 – have already come to pass (and cause losses), force majeure provisions can be written with specificity that greatly narrows its scope. That specificity can:
- Vary by contract and industry (excusing nonperformance entirely, or simply deferring performance of an obligation until the force majeure event ends); and
- Become necessary to the “bright line” test which determines at what point in time force majeure protection is triggered. If, for example, a contract specifies “health crisis,” would that mean local, state, federal, or global declaration?
This specificity also means there is no universal definition of a force majeure event. if a contract does not explicitly state “global health crisis” or “disease” or “pandemic,” a careful consideration would be required to determine if another term (such as “act of God” or “act of nature”) may suffice. In the U.S., many force majeure clauses broadly define such events as simply being beyond a party’s control.
Precise language, and creative arguments, are often key to bringing or defending against business litigation over force majeure provisions.
Did the Event Hinder, Delay or Prevent Performance & Duty to Mitigate?
Should COVID-19 constitute a force majeure event in a given contract, it must also have hindered, delayed, or prevented performanceof the contract in some manner. This may include:
- Project cost overruns
- Project delays
- Inability to procure supplies
Additionally, force majeure protection requires an affected party to prove it has made reasonable efforts to perform. Like the force majeure event itself, reasonable effort will depend on the specific circumstances of a contractual relationship, industry, and parties involved. Examples include:
- Assessing inventory;
- Evaluating affected suppliers’ allocations;
- Identifying available manufacturing or inventory at other locations;
- Addressing alternative work-solutions during facility closures / quarantines;
- Seeking alternative suppliers to mitigate damages during the time period;
The reasonableness of these efforts are considered in light of any additional burdens incurred by the affected party, as well as availability at the time of the event, and the overall impact on contract obligations. Given COVID-19s extensive global impact thus far, it may be possible that affected parties have fewer available mitigation efforts than in other force majeure events.
Force Majeure Protection
Though there are no laws outlining the rules and procedures for force majeure protection; most clauses establish the process in writing. This may involve, among other steps:
- Providing notice as soon as practically possible;
- Responding to notice in a reasonable manner;
- Providing supplementary and additional information as it becomes available;
- Determining whether to terminate a contract in its entirety, or modify the original contract to accept partial performance in a reasonable time.
In addition to following protocol established by contract, affected parties should preserve all evidence related to the force majeure event and its impact on their business, including:
- Local, state, and federal government notices;
- Applicable regulations, rules, and health guidelines;
- Travel, transportation, or event cancellations;
- Notices of facility or service closures;
- Internal communications to employees and customers;
- Health care documentation or documentation of quarantines.
What Businesses Can Do Amid Coronavirus Contract Concerns
As COVID-19’s impact on businesses evolves, companies would be wise to take some precautionary and anticipatory steps to:
- Review contracts and force majeure clauses;
- Determine how a contract defines a force majeure event and whether such a definition would encompass COVID-19;
- Consider aspects of the contract that cannot be performed or satisfied due to direct or indirect consequences of COVID-19;
- Evaluate measures for reducing the impact of COVID-19 on contract performance;
- Consider whether notice is required to trigger force majeure protection, and what documents need to be submitted;
- Assess the consequences of a force majeure claim, and whether insurance may cover any expected loss.
Hendershot Cowart P.C. is closely tracking COVID-19 and its impact on our clients and others immersed in complex contractual relationships. If you have questions about a potential case, our nationally recognized attorneys are available to help. Call (713) 909-7323 or contact us online.