For all of our clients, but especially our business clients, the events of the past two months have created a world of chaos for their day-to-day operations. These events have also put strains on contractual relationships between businesses and individuals alike. People seem to be looking everywhere for answers only to find that answers, or at least what they were hoping to hear, are not to be found or are extremely complex.
And as a result of these events, one of the big topics in the legal world these days when it comes to contracts and contractual interpretation, has been the use of “force majeure” clauses and application of legal doctrines related to force majeure events (for contracts without such clauses) and how they might apply with respect to the COVID-19 crisis (“C-19”). This might be specifically of importance to our clients with leases of both the traditional and oil and gas variety, as well as those in construction or other industries with contracts that rely on supply chains, transportation, and labor.
There are a number of posts and other information available out there – actual books and treatises if you’re having trouble sleeping and looking for light reading – through the ABA, and individual law firms that address this issue (complete with footnotes and citations), so I’m not going to get hypertechnical or reinvent the wheel, but try to hit some of the highlights.
“So what is a “force majeure” clause and now does it impact my contract?”
The term “force majeure” is actually French in origin and translates to a “superior force,” but is more commonly known or referred to as “an act of God.” It’s defined as “an unexpected and disruptive event,” and in the context of contractual obligations and enforcement, can excuse performance by a party to the contract.
These clauses often list a variety of instances or situations where the parties agree that performance is excused or suspended for a period of time due to the particular circumstance. One of the easiest ways to spot one is to look for the phrase “act of God” in the contract. The most common events and terms you may find are tornadoes, hurricanes, earthquakes, and floods. As well as certain “man-made” events, like acts of terrorism, strikes, riots, and wars. Other regularly used examples and terms within such clauses include “labor troubles,” “inability to procure materials or services,” “restrictive governmental laws or regulations,” “insurrection,” “sabotage,” and “acts of public enemies.” And some clauses, especially of late, may include specific reference to “communicable diseases,” “disease outbreaks,” “epidemics,” or “pandemics.” The list can actually be rather broad, but really in the case of a contract one is considering entering into or drafting, should probably be tailored to the specifics that would make the objective or purpose of the agreement impossible to perform.
“But why? And what does that have to do with C-19?”
In the context of a force majeure clause in a contract, interpretation is narrow and generally restricted to what is within the language of the provision. In other words, it depends on what’s defined as a “force majeure event” within the contract. If the clause includes events/occurrences such as “communicable diseases,” “disease outbreaks,” “epidemics,” or “pandemics,” it’s pretty easy to determine the clause would apply with C-19. But, keep in mind, not every force majeure clause is going to specifically list these health-related impacts. However, there are some events and impacts that may result from C-19 which could apply (e.g., “act of government,” “restrictive governmental laws or regulations,” “states of emergency,” “inability to procure materials or services”).
Regardless of the particular language used, it’s also important to remember that even with such a clause, parties have a general obligation to mitigate foreseeable risk of non performance, and often cannot invoke the clause when the potential nonperformance was foreseeable and could have been prevented or otherwise mitigated. Equally important is the often overlooked requirement of prompt and adequate notice. And, depending on the jurisdiction (because the law is often different from state-to-state), the party relying on the clause is going to have to show how performance is truly impossible or impracticable, and not merely financially or economically more difficult to satisfy.
Guidance and discussion on the topic has continued to evolve over the course of the past 45 days. Some have started cautioning against inserting clauses in new contracts, or relying on or attempting to invoke force majeure. There’s also discussion of the degree to which C-19 and the measures taken as a result of it constitute an unforeseeable event, as the impacts in the Far East and Italy, and for us in North Dakota and the north-central United States, those in Washington, California, and New York were known prior to the mid-March closures here. However, with that said, there’s still room for interpretation and argument as to the degree of foreseeability of their overall impact and parties’ abilities to truly mitigate or avoid nonperformance due to those impacts (those might be litigators you see circling overhead 😉).
While it would be difficult to deny the innumerable commercial disruptions inevitably caused by travel restrictions, quarantine and social distancing orders, cancellations of large gatherings, and other efforts being taken to address the crisis – including labor shortages, delays in supply and distribution of materials, and workplace closures – qualify as a force majeure event, there may still be problems with the legal precedents from state-to-state. Such being the case, it is important to contact counsel for particular guidance when dealing with questions about ability to perform or enforce a contract.
“What if my contract doesn’t have one of those force whatchamacallits in it?”
There are also other legal doctrines and protections available for parties who are in a position where the circumstances of the day make holding up their end of the deal impossible. Depending on the particular jurisdiction, a party may be able to rely on the doctrines of frustration of purpose, impossibility, impracticability, or commercial frustration, to avoid negative consequences due to their inability to perform their duties under a contract. And, in some jurisdictions, depending on how a force majeure clause is drafted and interpreted, these doctrines may also supplement the clause – BUT in others, the presence of the clause may preclude reliance on the doctrines. This is another good reason why it’s important to consult with legal counsel for guidance when dealing with questions about ability to perform or enforce a contract.
“So what should I do?”
The best general (and free!) advice is to work and communicate with one another, be an understanding and empathetic human being, and act civilly toward one another. You’d be shocked how many people could have avoided huge legal bills had they just picked up a phone and civilly talked things through with the other side. But if everyone was actually capable of following such advice, services from this profession would not be in such high demand.
There are options such as business interruption insurance which may be available through umbrella and other business policies. Thus, it may be wise to pull out your policy binder and read up (also can be a great resource for the aforementioned sleep deprivation issues), as well as consult with your legal counsel (because they are not the easiest things to read and understand).
Before taking action, it would be wise to step back and consider the consequences. If you’re in a position where you may claim a right not to perform, how might that impact your business’ reputation, as well as any existing or future relationships? Likewise, if you’re in a position where a partner or someone you have a contract with may need a little slack, what impact will demanding strict compliance have on your reputation and current or future relationships?
If you’re in the “might/probably not able to perform” camp, the conventional wisdom is to make a good faith attempt at performing, or find/take other steps to achieve the overall goal of the contract. You’ll also want to keep a detailed log of evidence showing how performance was made impossible, impracticable, commercially unreasonable, etc. by the event/pandemic, as well as your efforts to find alternative means of performance, your communications with others (especially the other parties to the contract), and the financial impacts, costs, and other losses incurred. And, if planning to claim excuse of performance under a force majeure clause, make sure to follow all the contractual requirements as a condition of excusing performance, such as timely notice, mitigation of damages, and any dispute resolution procedures.
If you’re in the “other party cannot/might not/probably will not be able to perform” camp, it may be wise to consider renegotiation on terms that are reasonable under the situation, and, if warranted, point out ways the other party or parties could still perform, or reasonable alternatives they could take in mitigation. The goal, presumably, should be to achieve the purpose of the contract, or make the “deal” work for everyone. Because, frankly, in litigation nobody ever really wins and nobody is ever really made whole.
If you need help with a contract, lease, or any agreement, please send a message or give us a call. In the meantime, we sincerely hope you all are and remain safe and well.