An important topic during this time of the coronavirus pandemic, economic crisis, and constant uncertainty is contracts. In this week's Freedom Friday blog, I'm going to discuss contracts, and specifically the concept of “force majeure.”
So, what is “force majeure?” “Force majeure” is a French term, which literally translates to “superior force.” It is also a legal term, which means an uncontrollable, irresistible force, uncontrollable by the parties to a contract, e.g. an act of God. “Force majeure” is a contract clause which can provide the parties to a contract a defense so that they can suspend or cancel their performance required by the contract, under certain circumstances. It can also limit that party's liability under certain circumstances. How a “force majeure” clause will apply does depend on the facts and circumstances, and how that clause is written in the contract.
There is a case from 1991 where the court stated that when a party cannot perform its obligations under a contract due to an “act of God,” or unforeseen circumstances, that the “act of God” or unforeseen circumstances does not excuse the party from its contractual obligations, unless the parties expressly provided otherwise. Unless the contract has a “force majeure” clause, the parties are not excused from performing the obligations under the contract due to circumstances beyond the control of the parties. However, if a contract does have a “force majeure” clause, such “acts of God” or unforeseen circumstances, may excuse a party from performing their obligations under the contract, depending on the language of the “force majeure” clause itself. In the context of COVID-19, whether the coronavirus issue will excuse a party from performing obligations under a contract will depend on the language of the “force majeure” clause. For example, if a “force majeure” clause includes language that includes events of “pandemics” or “disease,” or related topics, then most likely it is clear that this language does apply to pandemics such as COVID-19, and that language would excuse or allow the party to delay their performance of their obligations under the contract. But such language of “pandemics” is not very common in contracts. Typically, a “force majeure” clause will include broader, catch-all phrases, e.g. “acts of God,” disasters, and perhaps the ultimate catch-all, “any other circumstances beyond the parties' reasonable control.” The issue then is COVID-19 included in the catch-all phrases of a “force majeure” clause? Many businesses are unable to perform their obligations due to restrictions caused by shutdowns and stay-at-home orders, and so many businesses are asserting “force majeure” as a way to limit their liability due to their inability to perform.
Usually a “force majeure” event is outside the parties' reasonable control, is unforeseen, and the event must be materially affecting the party's ability to perform its obligations under the contract. If COVID-19 pandemic is not affecting a party's ability to perform its obligations, then “force majeure” cannot be used as a defense to failing to perform obligations under the contract. But if the coronavirus pandemic does materially affect a party's ability to perform its obligations under the contract, then “force majeure” might be a defense. Lastly, the parties must take reasonable steps to mitigate damages or minimize damages or delays that result from the lack of performance of obligations under the contract.
Importantly, “force majeure” only applies if the obligations are impossible to perform due to the circumstances. The obligations cannot be just burdensome, more difficult, or inconvenient. The standard for a material affect requires a causal link between the coronavirus and the party's inability to perform obligations under the contract. There is also an issue of whether the events were foreseeable by the parties. Some people consider pandemics like the coronavirus to be unpredictable, but inevitable. However, other people believe that we should expect this type of pandemic, in light of H1N1 and SARS, this pandemic could be reasonable foreseen. If the contract was executed before the pandemic started happening, around January 2020, then it's likely that “force majeure” would apply, because the pandemic was not foreseeable. However, if the contract was entered into by March 2020, the pandemic became foreseeable.
Overall, it is best to discuss with an attorney your rights and options with any contract, especially if your small business is affected in any way. The attorney will need to review the contract and any possible “force majeure” clause in it, and then will be able to give you advice and counsel regarding the contract.
If you have a question about contracts, or if your small business is needing help in the midst of COVID-19 and during this time of uncertainty and constant change, please feel free to contact me at [email protected] to schedule a free discovery call.
For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com