Previously reserved for unlikely events such as floods and other natural disasters, force majeure clauses have seen a rise in invocation in the wake of the COVID-19 pandemic.
With the pandemic disrupting industries globally and inhibiting many companies from satisfying contractual obligations, the doctrine of force majeure is proving a useful remedy for some parties looking to free themselves from their contractual obligations. However, this option is not without complications, and the ongoing pandemic looks poised to complicate matters further.
If COVID-19 has impacted your ability to fulfill a contract’s terms, consulting a legal team can help you understand the steps you can take to mitigate loss and navigate complex litigation.
What is Force Majeure?
Force majeure refers to unforeseeable circumstances that hinder, delay or prevent a party from fulfilling their contractual obligations. A force majeure clause in a contract frees the affected party from liability and responsibility if an event outside their control interferes with their ability to perform under the contract’s terms.
Some events that may trigger a force majeure clause include fires, floods, wars, riots, governmental action, acts of terrorism, and natural disasters such as earthquakes, hurricanes, and landslides.
For an event to be considered a force majeure, it must be unforeseeable and outside of either party’s control, making it unavoidable. If possible, the affected party must also act to mitigate the impact of the force majeure event and provide the contract’s other party with timely notice.
In general, a force majeure clause has four main components:
- A definition of the breach for which a party may be excused
- A definition for the “force majeure event” itself
- A requirement and definition for the causal connection between the force majeure event and the breach
- A description of what will happen if performance is excused
If a force majeure clause is successfully invoked, the affected party may be able to:
- Terminate the contract without liability
- Extend time to complete the contract, with a right of refusal available to the other party
- Halt performance under the agreement without liability until the force majeure event is over
What constitutes a force majeure event is defined and interpreted differently depending on the jurisdiction. For example, a hurricane occurring in Florida may not be interpreted as an unforeseeable event, as the state is prone to such natural disasters. If a hurricane were to hit the coast of England—an improbable and near impossible event—it would likely be considered unforeseeable and trigger a force majeure clause.
Likewise, the scope of a force majeure clause depends on its terms. Provisions in a force majeure clause can be negotiated between parties to include specific events. Alternatively, two parties may choose to use a boilerplate force majeure clause in their contract to keep matters simple. In any case, the interpretation of a force majeure clause rests with the governing state, which has been the cause of many force majeure “headaches” relating to the COVID-19 pandemic.
Does COVID-19 Trigger a Force Majeure Clause?
As mentioned, what type of event constitutes a force majeure depends on the contract’s wording. In general, health crises such as a global pandemic are not included in force majeure provisions.
In the case of COVID-19, whether a force majeure clause can be invoked depends on the impact that COVID-19 has had or will have on the party’s ability to fulfill contractual obligations. If the contract’s completion is not impossible and the affected party has another option available, invoking a force majeure clause may not be possible.
Some companies may be able to successfully invoke a force majeure clause due to labor shortages, factory closures, and any supply chain issues resulting from the rapidly spreading virus. Similarly, companies or individuals forced to cancel an event due to government restrictions beyond their control may be able to invoke a force majeure clause. In some cases, force majeure exceptions may be applied even without an explicit force majeure clause if an unusual and extreme circumstance interferes with a business’s operations.
Again, whether or not a force majeure clause can be invoked successfully depends largely on the contract’s specific wording. Although it is possible, a party to an agreement should not assume that COVID-19 will automatically relieve them of their contractual obligations.
What Happens If My Contract Does Not Include a Force Majeure Clause?
Even if an agreement contains no force majeure clause, the doctrine may still apply.
For example, provisions in The Uniform Commercial Code (UCC) may excuse a seller of goods from their contractual obligations under specified circumstances, including:
- If a seller is forced to halt operations due to governmental regulations or orders, it may be excused under UCC § 2-615.
- If the seller’s performance becomes impracticable due to unforeseen events beyond their control, their contractual obligations may be excused under UCC § 2-615.
Similar laws may be applied to the sale of services but are state-specific and require analysis of the common law and equitable principles applicable under the state’s jurisdiction.
New York Federal Court Rules COVID-19 Pandemic a “Natural Disaster” in Force Majeure Case
In JN Contemporary Art LLC v. Phillips Auctioneers LLC, a New York federal court found that the COVID-19 pandemic constituted a “natural disaster” and thus could trigger a force majeure clause.
The dispute arose between the plaintiff, an art seller, and the defendant, an art auctioneer, when the defendant refused to hold an in-person auction at which one of the plaintiff’s artworks would be sold. The defendant had previously agreed to auction the painting in an in-person setting through a negotiated contract. However, restrictions on in-person gatherings and business operations withheld the defendant from doing so in a timely manner. The defendant terminated the contract, arguing that the pandemic excused the decision by invoking the contract’s force majeure clause.
The court upheld the defendant’s argument, ruling that the pandemic and the government shutdown orders resulting from it were beyond the parties’ control and even constituted a “natural disaster,” as contemplated by the contract’s force majeure clause.
The court’s ruling was one of the first to explicitly state that the pandemic could constitute a natural disaster and trigger a force majeure clause. The decision is highly unusual given that the term “natural disaster” usually applies to weather-related incidents and environmental disasters. The ruling also deviates from the courts’ history of narrowly interpreting force majeure clauses due to seeing them as extraordinary relief measures.
Other decisions by the Pennsylvania Supreme Court and the Circuit Court of Virginia follow the New York court’s decision to find the pandemic constitutes a natural disaster. The rulings may set a precedent for contract parties to be excused from their performance due to the COVID-19 pandemic.
On the other hand, the pervasiveness of the pandemic may lead some to construe it as a foreseeable event in the future, especially as the pandemic way of life becomes the “new normal.”
Can COVID-19 Still be Considered Unforeseeable?
One issue that has arisen recently is whether COVID-19 can still be interpreted as an unforeseeable event. Some argue that parties will not be able to make this case as the pandemic drags on.
As the world adapts to the virus and it becomes seemingly less “novel,” courts may be expecting parties to have adjusted to the pandemic’s ups and downs.
Parties looking to invoke a force majeure clause due to pandemic-related issues may struggle to do so in the future, even if their contract explicitly references the pandemic. While explicitly naming the pandemic a force majeure event in the clause can make it easier to argue, it can also work in the opposite way.
Some courts may be increasingly skeptical and reluctant to see COVID-19 as an unforeseeable event, given that it has had an impact on business operations for nearly two years. If this is the case, parties will have difficulty invoking a force majeure clause for COVID-related reasons.
Force majeure clauses have historically been difficult to invoke. A force majeure event must be outside either party’s control and unforeseeable at the time the contract was signed. In the case of COVID-19, courts will consider whether the contract’s parties could have reasonably foreseen the pandemic when the contract was created.
Some courts have argued that the parties’ ability to name the pandemic as a risk in a force majeure clause effectively makes it a foreseeable event at the time of contracting. Some even argue that it makes the pandemic foreseen, which would defeat other defenses to non-performance, including the impossibility of performance or frustration of purpose.
Similarly, courts may be more inclined to focus on government restrictions and shutdown orders as the cause of non-performance rather than the pandemic as a whole. This would complicate matters for business owners, as such events are generally considered foreseeable.
How Can Business Owners Navigate the Uncertainty?
With the success of a force majeure clause largely hinging on its interpretation by the governing state, business owners should take actions to ensure they protect themselves as much as possible, including:
- Reviewing contracts and analyzing their provisions regarding delayed performance due to force majeure
- If possible, updating your contract’s force majeure clauses to include current risks resulting from epidemics and pandemics
- Providing the other party to the contract with timely notice of a force majeure event
- Trying to mitigate or avoid the force majeure when possible
- Keeping a record of everything leading up to and surrounding the force majeure event
- Preparing for potential litigation
If you are drafting a new contract, consider doing the following:
- Explicitly stating that the parties involved are unaware of any potential force majeure events
- Including phrasing that allows each party to take reasonable action to comply with pandemic-related restrictions and protecting the well-being of its employees, including suspending or slowing business operations
To ensure you are as protected as possible and to increase the chance of successfully invoking a force majeure clause, consult an attorney about your contract’s terms before signing.
Force Majeure Legal Expertise
With the full impacts of the COVID-19 pandemic yet to be fully felt, force majeure litigation will continue to complicate matters for business owners. Reviewing contracts and preparing for potential litigation is your best line of defense to mitigate force majeure headaches due to COVID-19.
If you have any further questions about force majeure clauses or need assistance drafting and modifying force majeure clauses due to the COVID-19 pandemic, reach out to Sollertis today to discuss your next steps.
