Prior to the COVID-19 pandemic, force majeure provisions have been generally overlooked as standard “boilerplate” contract language that, if included at all, references things such as extreme weather, terrorism, war, riots, lockouts, strikes, government action, etc.
It is important to note that force majeure is not a general concept that kicks in when overwhelming circumstances prevent a party from performing. Rather, it is a specific provision that, to be enforceable, generally must define what constitutes a “superior force,” what events would trigger the provision, the remedies available to both parties, and how a party would be excused from its obligations. Certain clauses list specific conditions that will be considered a force majeure and relieve a party of some or all of its contractual obligations. Other force majeure clauses are drafted more broadly, leaving more flexibility to include, for example, a pandemic.
Assuming that a force majeure provision exists and is applicable to COVID-19, parties will still need to determine whether their inability to perform under a contract was caused as a direct result of the pandemic and the resulting conditions (such as quarantines, stay-at-home order, and closing of “non-essential” businesses). To maximize the chance of a successful force majeure claim, parties should gather as much documentation as possible – such as CDC guidelines and federal, state and municipal government orders – demonstrating the relationship between COVID-19 and their failure to perform under the contract.
The contract might contain specific notice provisions that a party is required to honor in the event of a force majeure or other anticipated inability to comply with the contract. The contract might also require arbitration of disputes arising from the failure to perform.
Finally, a party seeking to be excused from performance under a force majeure provision generally must demonstrate that it exhausted all reasonable means of compliance with the contract. Parties should carefully document any alternative means of compliance that were considered and the reasons they were either rejected or found to be impossible or impracticable. Both parties may be challenged to show that there were no ways they could have lessened their damages. Also, specific to COVID-19, if you seek relief, you might even need to show that you properly and timely applied for a Paycheck Protection Program loan (or other government assistance) and that either your application was rejected or the assistance received was inadequate. Again, this determination will be very fact-specific and made on a case-by-case basis.
Non-Contractual Defenses
Even if your contract is silent on the parties’ rights and obligations in times of crisis, various affirmative defenses may be available to you, such as “commercial impracticability” or “frustration of purpose” due to governmental acts.
Courts have generally held that it is against public policy to require a party to continue to attempt performance when a subsequent government regulation or ordinance has made that performance illegal or practically impossible.
Your non-contractual defenses might include “act of God” protection. Legal interpretations of an “act of God” include naturally caused events or occurrences that could not have been anticipated and make performance impossible. Under Arizona law, an “act of God” defense requires complete exclusion of any human act or “human agency” from the cause of the loss.
Even if a contract does not have a force majeure clause, a party’s obligation to perform may still be discharged under the “doctrine of impossibility.” The doctrine refers to situations when it is physically impossible for a party to a contract to perform. Courts are unlikely to excuse performance that is not impossible but merely inconvenient or expensive, but a party that meets the high standard of impossibility may be excused from all or part of its performance obligations.
As noted above, whether an inability of a party to perform a contract will be legally excused depends to a great extent on the specific facts and contract. If you find yourself in this position during the pandemic, we would be happy to discuss and work through your contract with you.
