The Coronavirus and Force Majeure Clauses in Contracts – SALCINESLAW

With the Coronavirus (COVID-19) taking over the country and businesses, businesses are now seeking to determine whether they are obligated to perform under their contracts, or whether they can invoke a force majeure clause to excuse performance temporarily or even permanently.

Force Majeure Clauses Generally

Not all contracts contain force majeure clauses and even if they dont, there are still protections afforded by law. The force majeure clause is a contractual provision which excuses one or both parties’ performance obligations when circumstances arise which are beyond the parties’ control and make performance of the contract impractical or impossible.[1]

Force majeure events typically enumerated in contracts include:

1. acts of God, such as severe acts of nature or weather events including floods, fires, earthquakes, hurricanes, or explosions;
2. war, acts of terrorism, and epidemics;
3. acts of governmental authorities such as expropriation, condemnation, and changes in laws and regulations;
4. strikes and labor disputes; and
5. certain accidents.[2] Economic hardship typically is not enough to qualify as a force majeure event on its own.[3]

Determining whether a force majeure clause can be invoked depends on the specific language of a contract. Generally, force majeure clauses are confined to situations of the kind or nature which limit damages in a case where the reasonable expectation of the parties and the performance of the contract have been frustrated by circumstances beyond the control of the parties.

State Specific Requirements for Force Majeure Clauses: Florida

The CDC defines an epidemic as an outbreak of disease that infects communities in one or more areas, and a pandemic is an epidemic which spreads across the globe. If a contract at issue lists epidemics or pandemics as a force majeure event, the claiming party could argue that the coronavirus qualifies in light of the fact that is has been officially declared a pandemic by World Health Organization.

If a force majeure clause does not list epidemic or pandemic as a triggering event, it is possible that the coronavirus could be covered as an act of governmental authority in some areas, given that many governments, including the United States government, have instituted lockdowns to prevent the spread of the coronavirus.

If a listed force majeure event occurs, however, there is still further analysis required to determine whether invocation will be successful.

Under Florida law, a party seeking to invoke a force majeure clause must show that the force majeure event was unforeseeable, and that the force majeure event occurred outside the party’s control. This means that the claiming party must show that the event could not have been prevented or overcome, and there additionally cannot be any fault or negligence on the part of the claiming party.

Some contracts additionally require that the claiming party give the other contractual parties notice before invoking a force majeure clause. If the claiming party does not give proper notice as set forth in the contract, it could preclude successful invocation of a force majeure clause.

Businesses seeking to invoke the force majeure clause of their contracts likely have a strong argument that the coronavirus outbreak is an unforeseen event, unless the parties entered into the contract after the outbreak of coronavirus. Whether businesses have also attempted to perform their contractual duties despite the coronavirus outbreak, and whether that is even required under a particular contract are questions that must be assessed on a case-by-case basis.

Other Options: Impossibility/Impracticability and Frustration of Purpose

If a party is unable to successfully utilize a force majeure clause to excuse performance during the coronavirus outbreak, or if a contract does not contain a force majeure clause, other options may still potentially be available to excuse performance, such as the defenses of impossibility and impracticability. 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.” The Restatement (Second) of Contracts defines impossibility as “not only strict impossibility but impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved.”

If a contract does not contain a force majeure clause, and an impossibility or impracticability defense fails, another possible defense for a party unable to fulfill its obligations under a contract due to the coronavirus is frustration of purpose. For the doctrine to apply, “the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense. ”Put differently, frustration of purpose occurs where “a change in circumstances makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract.” Business should be mindful, though, that economic hardship such as an increase in the cost of performing under a contract is not enough to assert a frustration of purpose defense.

Conclusion

The coronavirus is having a significant and harmful impact on businesses and their ability to perform under their contracts. However, whether a claiming party can successfully invoke a force majeure clause, an impossibility/impracticability defense, or a frustration of purpose defense in order to excuse performance due to the coronavirus is a fact intensive inquiry and must be assessed on a case-by-case basis. Contractual parties must look to the specific language of the contract, including the applicable law, to determine their likelihood of success.

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