Can the Coronavirus Get Me Out of a Business Contract? Enforcing Force Majeure in the Wake of the COVID-19 Pandemic
On March 9, 2020, Governor Mike DeWine took several actions to combat the spread of Coronavirus (also known as COVID-19), including declaring a state of emergency in Ohio. Shortly after that, the World Health Organization (“WHO”) declared the Coronavirus a pandemic, causing the governor to put even further protective measures in place. Not surprisingly, these actions have had a significant impact on business operations throughout the state and have left many businesses wondering what their rights are when they are prevented from meeting their contractual obligations.
Due to the risks that Coronavirus poses to virtually all types of businesses, companies must consider the potential impact these preventative measures could have on their operations. Taking proactive measures to mitigate risk, assess contracts and insurance policies, and ensure adequate protection and coverage will decrease the likelihood of force majeure disputes. It will also assist parties asserting force majeure claims by showing they took reasonable steps to comply with their contractual obligations.
Understanding Force Majeure
So, what exactly does “force majeure” mean? Generally, it arises in the form of a contractual provision that excuses a party’s nonperformance when “acts of God” or some other extraordinary event prevents a party from fulfilling its contractual obligations. A force majeure clause defines what constitutes a force majeure event, as well as the effect that such an event would have on the rights and obligations of the parties.
In considering the applicability of force majeure, courts consider whether the event qualifies as force majeure under the language of the contract — whether the risk of nonperformance was foreseeable and able to be mitigated, and whether the performance was truly impossible.
Coronavirus’ classification as a pandemic by the WHO will trigger force majeure clauses that expressly account for such events. Clauses that are silent on pandemics or viral outbreaks are likely to be insufficient for a force majeure defense unless the courts liberalize the force majeure analysis to account for this specific incident. Ultimately, the courts’ reaction to this pandemic remains to be seen. However, if a force majeure clause clearly covers Coronavirus, parties seeking to invoke the provision will not need to establish the event was unforeseeable. They will, however, still need to show that they took steps to mitigate their damages, and that performance of the contract is truly impossible.
While courts will likely reject a force majeure claim if the parties’ agreement does not contain a force majeure clause, parties seeking to excuse nonperformance may still avail themselves. Common law doctrines of impossibility or impracticability can excuse the performance of a duty, where the duty has become unfeasibly difficult or expensive for the party who was to perform.
What happens if this pandemic constitutes a force majeure event?
If the Coronavirus pandemic constitutes a force majeure event, the effects depend on the terms of the contract. The impacted party’s performance must be prevented, impaired, or delayed due to the force majeure event for the clause to excuse its inability to perform. Accordingly, the courts give consideration to what extent the force majeure event caused the impacted party’s failure to perform in order for the clause to apply.
For example, a mandatory restriction on travel or shutdown of commerce that prevents a party from fulfilling its obligations under a contract for hosting an event may be considered a force majeure event under that contract. Still, a party’s decision to not go forward with the event (including for fear of the spread of Coronavirus or simply a lack of demand as a result) may not be a force majeure event under that relevant force majeure clause. The parties should consider whether the force majeure clause covers prevention of performance only by the force majeure event, or if it extends to the resulting events stemming from the force majeure event.
Typically, a force majeure clause will also impose various obligations for the parties to follow. For example, the impacted party must usually provide notice to the other party after it becomes aware of the event and will likely be required to mitigate its damages. If the party invoking the clause fails to do this, they may be prevented from raising a force majeure claim.
Lastly, the parties should consider whether the terms of the contract completely relieve a party from performance when a force majeure event occurs, or if it merely delays the performance until the conclusion of the event. If a force majeure event arises, the contract may provide the parties with certain remedies, including the right to terminate the contract without liability if the event continues for a specified number of days.
Response to the Pandemic and Assessing Risk
In the wake of Coronavirus, businesses (as well as consumers) should review existing contracts to assess their risk and exposure and consider adjusting the language in force majeure clauses in future contracts. For new contracts entered into after the onset of Coronavirus, the company should consider expressly addressing epidemics and pandemics, as well as matters arising as a result, such as restrictions on travel, quarantines, and shutdowns of commerce.
If a company anticipates that it will not be able to perform under a contract due to Coronavirus, it should document support for a potential force majeure claim, including timing, size of the impact, and mitigation efforts. Further, the company should consider contingency plans and immediately put affected parties on notice. Effective communication during these uncertain times may very well be the key to mitigating these damages, which in turn will minimalize the risk and harm to all involved.