Overview of Force Majeure
With COVID-19 headlines dominating the news cycle, and with no end in sight to the uncertainty that the virus brings, affected businesses are wise to consider whether the current pandemic qualifies as a “force majeure.” In the last few weeks, the Chinese government has issued “force majeure certificates” to domestic businesses as a way of shielding companies from breach of contract claims, American businesses are sending mass e-mails to customers explaining that the virus prevents the company’s performance or operations, and businesses in an array of industries have sent formal inquiries to their service providers seeking confirmation of continued performance.
What is “Force Majeure”
The defense of force majeure will excuse a party’s performance under a contract if the non-performing party can establish: (i) that a force majeure “event” has occurred (ii) that such event has prevented such party’s performance under the contract, and (iii) that the non-performing party attempted to mitigate the consequences of its non-performance.
Force Majeure Event
Because force majeure provisions are creatures of contract and did not evolve from the common law, courts are relatively strict in reading these provisions and will hesitate to deviate from the plain language of the contract. In particular, this means that the enumerated list of events that constitute a force majeure under your contract are given merit by the court. Conversely, courts often treat events critically if the alleged events are not specifically listed in the contract, like those events falling under a catch all phrase such as “all other events outside the reasonable control of the party.”
In the case of COVID-19, a court is likely to accept the virus as a qualifying event if the contract’s force majeure provision lists any illness concept: disease, pestilence, epidemic, pandemic, etc. If not, the traditional concept of an “Act of God” would likely apply. An “Act of God” is an action that arises naturally and is not the fault of any person (or group of persons). Nearly all force majeure provisions list an “Act of God” as a force majeure event sufficient to excuse contract performance. While many legal writers are currently speculating that courts will review force majeure cases stemming from COVID-19 less stringently than they have historically, it is more likely that courts will acknowledge the virus as an “Act of God” and decide cases within existing jurisprudence under this concept.
If a Force Majeure provision includes neither an illness concept nor an “Act of God” concept, the unprecedented nature of the global pandemic we now face means a business may very well have a viable argument that COVID-19 qualifies as a different kind of force majeure event. For example, governmental action and civil unrest are both commonly-enumerated force majeure concepts, and a reasonable mind could interpret either of these concepts to COVID-19 and its related impacts, especially as more government authorities issue orders and enact legislation with respect to the virus.
Two important notes for businesses: (1) generally a breach by a subcontractor is not a force majeure event the general contractor can avail themselves of, and (2) prior knowledge or foreseeability of the event generally bars the use of force majeure.
Prevention of Performance
Second, the force majeure event must actually impact performance. The degree to which performance must be impacted will depend on the language of each particular contract. Most commonly, the provision will state that the event has “prevented” performance. A well discussed example of this is an employee strike that prevents a factory from operating. Because the factory cannot operate, it cannot provide goods under its contracts. When evaluating a force majeure defense, courts will look closely at whether the alleged event is the actual cause of non-performance, or if a force majeure event has occurred but is being used to avoid an unrelated breach.
In the context of COVID-19, this inquiry will be simple for most contract parties. In Pennsylvania, where the governor has closed non-essential businesses, many businesses cannot perform functions that require their employees to be at work. Similarly, with many government offices closed, the inability to obtain permits or government approvals actually prevents businesses from proceeding with numerous business activities.
Finally, force majeure provisions generally require the non-performing party to mitigate the effects of the force majeure event. Even if the contract is silent on this aspect, a court is likely to impose a mitigation requirement. Courts have varied substantially on what the non-performing party must do to satisfy this mandate.
In general, a contract will specify what type of effort must be taken to mitigate (i.e., best efforts, reasonable efforts, aggressive efforts). Courts generally accept the specified standard, but several courts have imposed higher standards. If the contract is silent, the courts often apply a reasonable efforts standard.
What actually constitutes sufficient mitigation efforts is fact-specific to each contract, industry, and type of required performance. If a party has documented no mitigation efforts, a court will look unfavorably on any attempt to avoid liability for such party’s breach.
Other Contract Matters
Because force majeure is a contract concept, the other provisions of the contract still apply. In the force majeure context, careful attention should be paid to the notice requirements of the contract. Notice provisions state how and when another contract party must be notified under the contract. With COVID-19, it can be tricky to establish when the force majeure event occurred. In this case, promptly notifying contract parties is the best course of action. This is why businesses have sent mass mailers to notify customers of closures and many national brands are sending form letters to their landlords and service providers notifying them of ongoing business disruption.
Another common question is what to do when no force majeure provision exists in a contract. Historically, a court will not introduce the force majeure concept into a contract that does not contain such a provision. Force majeure is only one legal concept that is implicated by COVID-19, and the common law has developed several potentially relevant defenses to contract performance. Contracts that do not contain force majeure provisions are still subject to common law concepts of public policy (which excuses performance under a contract if the purpose of the contract is illegal), frustration of purpose, and commercial impracticability.