Of Contracts, COVID and Force Majeure Clauses!

Of Contracts, COVID, and Force Majeure Clauses

To put it lightly, COVID-19 has been a disruptive force throughout the busines world. The pandemic has had an unprecedented impact on the global supply chain, and both companies and families around the world are suffering the consequences. There are innumerable different considerations in dealing with the pandemic from a business perspective, and a possibly very important one going forward is the performance of contracts, and a rarely used boilerplate provision known as “force majeure”.

It is completely understandable if you have never heard of force majeure provisions. They are usually contained in a contract’s ‘miscellaneous’ provisions near the end. It literally translates to “superior force”, and is sometimes called an “Act of God” provision. The basic idea behind the force majeure provision is that if something happens that is totally unanticipated, completely out of either parties’ control, which prevents a party from being able to perform on the contract, then the affected party should be excused from performance without punishment. The idea seems simple, and fair, but as with all things related to the law, the devil is in the details as this clauses doesn’t stay simple for long. Accordingly, this article aims to break down how force majeure provisions work, how the clause could/should apply during the present public health emergency, and what to do if you are dealing with the application of this clause.  Before going too far in depth about a force majeure claim, I wanted to make two things clear from the outset. 

First, every state is different and while this article is speaking about general contract principles, local state laws and your specific contract could impact some of the information I’m sharing with you.

Second, I believe that COVID-19, and the effect it is having on the world, very likely counts as a force majeure event, but this has not been tested in many courts and the only way to know how a contract is to be applied is to ask a court to interpret the same, so I understand that a court could come along at any time and tell me that I’m wrong.

Bottom line, the reason I conclude that COVID-19 would be considered a force majeure trigger is by looking at the other specific bases for the same. Many force majeure provisions literally list “pandemic,” “disease,” or “epidemic,” as possible causes for failure to perform. As well, even if they don’t contain those specific terms, most force majeure provisions will have a catch all, something like “any other unforeseen and completely uncontrollable circumstance, such as an act of God, which totally prevents performance of the contract.” Assuming that a contract contains one of those two provisions, COVID-19 will most likely qualify. However, this does not mean that anybody can be let out of any contract now. Some very specific things have to happen, outside of just the force majeure event itself, in order for a party to be allowed to cancel a contract. Let’s take a look at them.

Now, one of the most important things to understand about force majeure is that it is a contractual term. This means that if the issue goes to court, the very first thing that the court will look at is the contract itself, and the terms therein. That important bit will serve as a backdrop as we then discuss the next parts of force majeure. There are some basic things that a party desiring to be excused from contract, using force majeure, needs to do. Here is a short breakdown:

1.                   Contract must have the provision- First and foremost, there must be an actual force majeure provision in the contract. If there is not, it will be difficult, if not impossible, to be let out of the contract. Arizona courts have considered other excuses for non-performance,[1] however relying on them would be difficult without an explicit provision in a contract.

2.                   The force majeure event (in this case, COVID-19) must be the cause of non-performance- This one is very important. A party cannot opt out of a contract because of COVID-19 generally. COVID-19 must have done something to make their performance either impossible or highly impractical.

• For example, if you run a theater business, and you cannot perform on a movie showing because your local government has restricted gatherings (because of COVID-19) to the point where you cannot put on shows, this would likely qualify as COVID-19 causing you to fail on your contract to perform in the movie showing.

• However, if you are a law firm, and the local court system has put in restrictions (such as mask mandates or online hearings), but you can still provide legal services, then COVID-19 likely will not suffice as an excuse to perform on a contract involving those services.

• Though not addressing force majeure specifically, one Arizona Court elaborated on what impossibility or impracticability should look like in order to be excused from performance. They said that “Completion of the job must require so much beyond the parties' contemplation that it becomes an exercise in commercial futility.”[2]

• There have been several indications that mere inconvenience or general economic downturn are not sufficient to excuse nonperformance. Same goes for money acquired through the contract. The contract producing less of a gain for one party does not automatically give rise to a force majeure claim.

3.                   Provide notice- The party claiming force majeure must notify the other party of the hardship they are facing and that they are planning on claiming force majeure. What constitutes sufficient notice will depend on the terms of the contract. If the contract itself is not clear, then the best rule of thumb is to tell the other party as soon as it is clear that performing on the contract is impossible (or nearly so). A party cannot simply stop performing or fulfilling on their duty without informing the other party. 

4.                   Mitigate- The party claiming force majeure must do something to try to reduce the harm or the damages done by the force majeure event. What counts as mitigating will be a decided on a case-by-case (pardon the pun) basis, so it is hard to say what will count as enough. What we can say is that a party wanting out of a contract must do something. A party cannot simply give up on performing without making some sort of good faith effort to perform.

• Examples of this might be- ordering materials from a different supplier, requesting a time extension on a deadline, sending different workers to a worksite, etc.

• In Utah’s only case with a good analysis of a force majeure provision, this was a big issue. The court in that case actually found the opposite, that the party claiming force majeure, though not totally at fault, had actually contributed to some of the delays and impracticality.[3] As such, because they had not mitigated the damages and in fact had made the situation worse, the party could not claim force majeure.

That is a basic summary about what somebody needs to do in order to claim force majeure and get out of the obligation of a contract. If a partner or somebody is claiming to be able to leave a contract that they have with you because of force majeure, then ask them about some of those things: What has COVID-19 done to hinder their performance? Have they done anything to mitigate?

It is also important to remember that, from a practical perspective, it is always best to try to work things out with the other party. Communicating with each other is key to avoiding litigation and disputes down the road. If you can come up with new terms for your contract that both of you are okay with, it is much better than going through a lawsuit dealing with a force majeure provision.

Lastly, we realize that these are trying times and if there is anything we can do to help walk you through this process, please let us know.

[1]https://www.uslaw.org/files/Compendiums2020/COVID19_ForceMajeure_2020/Arizona_USLAW_Compendium_COVID19_Force_Majeure_2020.pdf

[2] Willamette Crushing Co. v. State by & Through DOT, 188 Ariz. 79, 83, 932 P.2d 1350, 1354 (Ct. App. 1997)

[3] Desert Power, LP v. PSC, 2007 UT App 374, ¶ 14-16, 173 P.3d 218, 222