The spread of the coronavirus (COVID-19) has caused massive economic and societal instability. Global supply chains are in disarray, plants and stores have closed, and employees are sick or in self-quarantine to avoid getting sick. Many states have even taken additional measures to slow the spread of the virus, also known as “flattening the curve,” but those actions come with an economic tradeoff.
With all of these disruptions, small- and medium-sized businesses are facing serious productivity and operational issues. Cash shortages and production restrictions can make fulfilling existing contractual obligations difficult.
Businesses are now reexamining their commercial and business contracts to determine whether they are obligated to perform or whether they can invoke what is known as a “force majeure” clause, which will temporarily (or even permanently) release them from the contractual obligations.
Below is a broad review of the force majeure clause, the decision process your company must undertake before invoking it, and the options available to you in lieu of it.
What Is a Force Majeure Clause?
A force majeure clause is a contractual provision that excuses one or both parties from performing obligations when circumstances arise which are beyond either of the parties’ control and which make performance of the contract impractical or impossible.
While the actual language will differ, force majeure clauses typically list qualifying events, such as:
- Acts of God, such as severe weather, including floods, fires, earthquakes, hurricanes, or explosions;
- War, acts of terrorism, and epidemics;
- Acts of governmental authorities such as expropriation, condemnation, and changes in laws and regulations; and
- Strikes and labor disputes.
Determining whether a force majeure clause can be invoked is a fact intensive inquiry. Businesses should understand that when U.S. courts analyze a force majeure clause to determine if it applies, there are four key factors:
- The precise language in the force majeure clause;
- Evidence that the force majeure event was unforeseeable;
- Proof of causation between the force majeure event and the resultant failure to perform; and
- Evidence that the force majeure event’s effects are so severe that obligations cannot be performed.
Generally, the courts have interpreted force majeure clauses narrowly. The wording is not to be given expansive meaning and will be confined to things of the same kind or nature as those mentioned. Further, because the contracting parties themselves defined the parameters of the force majeure clause in their agreement, those parameters tend to dictate its application, effect, and scope.
Example of a Force Majeure Situation
Imagine you’re a Florida manufacturer, but you require a component from a Chinese factory to complete your product. Unfortunately, the Chinese factory has been shut down due to the coronavirus outbreak. Consequently, your plant is forced to temporarily halt operations and cannot fulfill your supply contracts.
In this case, the Florida manufacturer could argue that the negative effects of the coronavirus pandemic have completely prevented it from performing its contractual obligations. Importantly, the manufacturer would also have to prove that the force majeure event made it impossible to fulfill the obligations in another way, e.g. by using another supplier.
Florida Contracts and Force Majeure Clauses
It is no surprise that each state has its own rules and laws. This also affects the application of force majeure clauses as well.
Under Florida law, a party to a contract that is seeking to invoke a force majeure clause must show that the force majeure event was unforeseeable and that the event occurred outside the party’s control. They further must show that the event could not have been prevented or overcome. And, of course, the event cannot have happened due to any fault or negligence on the part of the claiming party.
Some contracts also require notice be given before invoking a force majeure clause. If the party does not give proper notice as set forth in the contract, a successful invocation of a force majeure clause could be precluded from the outset.
What to Do When Force Majeure Isn’t an Option
If you don’t believe your business can invoke a force majeure clause to excuse itself from particular contractual obligations during the coronavirus outbreak, or if a contract doesn’t contain a force majeure clause, all is not lost. Other options, namely impossibility and impracticability, could still be available to you.
Impossible or Impracticable
The Uniform Commercial Code (UCC) provides that a seller is excused from performing under a contract when “performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”
In our current situation, businesses could argue that performance under their contracts is impracticable or impossible. As of now, a national state of emergency has been declared, and many state and local governments are instituting health safety measures, such as ordering restaurants and bars to close, limiting gathering sizes, and asking citizens not to leave their homes.
Frustration of Purpose
Another possible avenue for a party unable to fulfill its contractual obligations because of the effects of the coronavirus is to claim frustration of purpose. In order for this to apply, the “frustrated purpose” must be the basis of the contract to such a degree that, without it, the transaction would be virtually pointless. Again, however, economic hardship alone is not enough to claim frustration of purpose.
Weathering a Storm
The rapidly spreading coronavirus is and will continue to have a significant impact on small- and medium-sized businesses. As the economy continues to slow down, companies may be faced with an inability to perform or fulfill a contract. Simply not performing is not an option, but you may have some remedies.
However, whether you can successfully invoke a force majeure clause, claim impossibility or impracticability, or cite frustration of purpose in order to excuse performance due to the coronavirus must be assessed on a case-by-case basis. Contractual parties have to examine the specific language of the contract and the law of the state to determine their likelihood of success.
Contractual language is highly specific and technical. Before taking any steps on your own, it’s best to get professional advice from a qualified business attorney.
Good Contracts Are Just Good Business
The business world is permeated by contracts. Poorly written contracts can cost a business hundreds of thousands of dollars. Understanding some of the basics about business contracts will help you grow and protect your business.
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Here at Alexander Abramson, we focus exclusively on business-related legal matters. Our attorneys have advised business owners and entrepreneurs for decades on all their commercial contract needs. We can help you define the necessary terms of a commercial relationship and ensure that those terms are included in a well-written contract that all parties understand.
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