By Sean Clancy and Kaci Hohmann
As the coronavirus (COVID-19) pandemic rips across the planet, relationships between the environment, governments, businesses, employers, property owners, and individuals are suddenly much more uncertain than usual. Information, guidance, and directives from authorities are changing daily and will continue to change. The total economic and human cost of this virus will not be known for a while, if ever. It is extremely difficult, if not impossible, to accurately predict what will happen next with our most important relationships.
Ordinarily, contracts help establish certainty in relationships, clarifying what’s supposed to happen and what’s expected from the parties. But what happens during a global health crisis when the parties are faced with unprecedented predicaments that hinder their ability to fulfill the commitments they made or intend to make?
The specific facts of each situation affect whether or not contracts are legally enforceable. Although every situation is different, there are a few legal principles that can shape what happens next.
A force majeure clause in a contract might provide a defense to breach or non-performance when “acts of God,” “acts of Nature,” extreme events, or other circumstances occur that are unforeseeable and beyond a party’s control. Force majeure clauses vary in scope depending upon negotiations between parties or, more commonly (until now maybe), whatever boilerplate language the contract drafter happened to include. Some force majeure clauses contain only broad catch-all language, while others are more specific. Such clauses usually identify a laundry list of catastrophic events that may include earthquakes, volcanoes, riots, declared war, acts of terrorism, and, sometimes, pandemics.
A party seeking to excuse its performance under a force majeure clause must demonstrate that its performance is delayed or made impractical or impossible because of the uncontrollable event. Financial burdens or mere difficulties in meeting obligations are insufficient by themselves to excuse performance under a force majeure clause. Courts typically consider whether: (1) the uncontrollable event fits within the definition of a force majeure event under the contract; (2) the risk of nonperformance was unforeseeable and unable to be mitigated; and (3) performance is truly impossible because of the event.
Specific references to an “epidemic” or “pandemic” in a force majeure clause probably cover COVID-19 depending on the circumstances contemplated for performance under the contract. Force majeure clauses that do not specifically mention “epidemic,” “pandemic,” or similar language, may still include COVID-19, depending upon how broad or narrow the language is. By now, COVID-19 almost certainly fits within a broad term like “act of Nature.”
Foreseeability is also crucial in determining what is excusable when an “act of Nature” occurs. Courts and legal experts might disagree about what was foreseeable by parties who formed contracts while the outbreak was in its earlier stages, outside the parties’ jurisdiction. But contracts currently formed during the pandemic that do not specifically address COVID-19 might not allow for excused performance because the parties now have knowledge of the pandemic. Virtually everyone on the planet is affected by COVID-19, so the existence of the virus itself is no longer unforeseeable. That said, it is difficult to know what additional consequences of COVID-19 may still be unforeseeable.
Additionally, if a party wants to be excused, it must prove that performance is an “impossibility.” Even if there isn’t a force majeure clause in a contract, sometimes contractual performance can still be excused based upon common law legal concepts of “impracticability” or “impossibility.” These legal concepts are heavily fact dependent, based upon the circumstances of the deal and the parties’ respective situations. As governments and businesses continue expanding limitations on travel, work, and gatherings of humans, contractual obligations might or might not be deemed legally impracticable or impossible.
There aren’t easy answers regarding what to do next. We recommend reviewing important existing contracts closely to understand rights, obligations, and exit strategies in light of the current COVID-19 pandemic; specifically, take a close look to determine if your contract contains a force majeure clause and ask what that clause does or doesn’t allow. Consider your options and available remedies if a party to the contract wants to excuse or delay their performance.
If you are entering a new deal and forming a new contract, you should consider the existence of COVID-19 during the contract’s formation and its potential effects on the deal later. If you want the counterparty to perform no matter what, consider an “anti-force majeure clause” or negotiating terms that explicitly prevent COVID-19 from being an excuse for nonperformance. If you are apprehensive about either party’s ability to perform, consider the advantages and disadvantages of addressing “pandemic” and COVID-19 specifically as a force majeure event.
Don’t hesitate to contact an attorney if you are concerned about what to do next. Our job is to develop creative solutions for difficult situations to help protect your goals, especially during times of uncertainty.