With all the uncertainty surrounding the COVID-19 pandemic, one thing is certain: COVID-19 is impacting your business.
Whether the impact is large or small, many business owners want to know what, if anything, they can do to protect themselves while continuing to honor their contractual obligations. With this in mind, you may be wondering whether declaring force majeure is the remedy to your business’s ailments.
What is “Force Majeure” and When Does it Apply
A “force majeure” provision excuses your non-performance of a contractual obligation when a certain event occurs. It is a creature of contract. This means that, if the provision is not included in your contract, you cannot rely on force majeure to escape that contract. When your contract includes a force majeure provision, the courts assume that you specifically negotiated its language. So, they will evaluate the plain meaning of the words contained in that provision to determine whether a certain event, like COVID-19, excuses performance.
Unfortunately, the courts strictly enforce the language of force majeure provisions as written. That is to say, the courts are unlikely to find that the provision applies to an event that is not plainly stated in the contract. In order to excuse your performance due to the impacts of COVID-19, your force majeure provision will likely be required to state that it applies in cases of business disruption due to “disease,” “epidemic,” “pandemic,” or similar language denoting an interruption in business due to large scale spread of an illness. However, many force majeure provisions contain a “catch-all” clause, which may be interpreted to include situations like COVID-19.
In addition, some force majeure provisions state that performance may be excused due to “Acts of God” or “Acts of Government.” Generally, courts will interpret “Acts of God” as referring to natural disasters, like flash floods, earthquakes, and hurricanes. Accordingly, even though the effects of COVID-19 caused significant interruptions to businesses and their workforces, it is unlikely that a court would interpret those effects as an “Act of God” unless the contract specifically defines an “Act of God” as a disease, pandemic, or some other similar phrase.
On the other hand, some businesses may be able to rely on an “Act of Government” to claim a force majeure event.
Historically, the courts have found that certain government actions, like expropriation, eminent domain, and changes in laws that significantly impact a business’s operations, constitute force majeure events. For example, the recent order by Pennsylvania Governor Tom Wolf may be an “Act of Government” that excuses performance for some businesses.
Under the Governor’s order, all ‘non-life sustaining” businesses are required to close their physical locations. Although the order does not apply to “virtual or telework operations,” not all businesses are capable of operating “from home.” For those businesses that require a physical presence to operate, and thus, must wholly cease operations, Governor Wolf’s order is likely an “Act of Government,” which would justify the use of a force majeure provision.
What Does “Force Majeure” Require
When applicable, a force majeure provision is an effective tool to mitigate the negative influence of an event like COVID-19. However, most force majeure provisions require a party to take a few steps before allowing it to forego its contractual obligations altogether. Typically, a force majeure provision requires a party to provide the other party with notice that it intends to invoke the force majeure provision. That notice likely will require you to describe the force majeure event and why it is beyond your control, how the event has impacted your ability to perform the contract, what performance has been impacted, and all the steps, within reason, that you have taken to avoid or alleviate the event’s impact. Unfortunately, most courts (and many contracts) do not allow a party to claim a force majeure event simply because performance is now more costly (or even wholly uneconomic) to perform.
Finally, force majeure provisions usually do not excuse performance of a contract indefinitely. Rather, many such provisions require a party to resume performance as soon as reasonably possible. This is true, as noted above, even where performance is more costly. When a situation is again under your control, you must perform. Nevertheless, when a force majeure provision is applicable, it is a valuable tool for any business looking to lower costs and diminish the effects of circumstances beyond its control.
Evaluating Your Contracts and Next Steps
So, is a force majeure clause the remedy for your current economic woes? Since force majeure provisions are creatures of contract, and each contract is different, we advise that you carefully read your force majeure provisions to determine whether the plain language applies to your business’s current circumstances. Moreover, if you chose to rely on a force majeure provision, ensure that you have taken all the steps outlined in the contract, including providing notice to the other party, mitigating the virus’s effect on your business disruption, and seeking alternative means to perform your contractual obligations. Finally, if it is not clear whether your contract’s force majeure provision applies to the effects of COVID-19, please contact the attorneys at Metz Lewis, and we will lend our proven guidance to help you determine the best path forward in this uncertain future.
This was written by John Paul Regan