COVID-19 and Your Contract Obligations
If you can’t fulfill your contractual obligations due to COVID-19, will your contract’s force majeure provision excuse your nonperformance?
If your vendor terminates your contract or fails to perform in a timely manner, will the force majeure provision in the contract excuse their non-performance?
Over the past several weeks, COVID-19 (or the coronavirus outbreak) has been causing many businesses and governmental institutions to temporarily reduce or shut down normal operations, in an effort to encourage social distancing. As businesses remain closed and local, state, and the federal governments continue to impose restrictions, you may find it impossible to fulfill your contractual obligations or to fulfill them on time. In addition, your vendors, suppliers, manufacturers, distributors and others may notify you that they are unable to perform under existing contracts. Depending on the language of your contract, COVID-19 might trigger a force majeure event that excuses your or their nonperformance.
Many contracts include a force majeure provision, which excuses a party’s nonperformance that results from an event that was beyond that party’s control. A typical force majeure provision lists the events that would trigger the provision, such as strikes, a natural disaster, or the outbreak of war. The provision might also include a catchall phrase such as an “other reason beyond the party’s control” or an “Act of God.” Usually, the party claiming that a force majeure event has occurred must show that the event falls within the definition of “force majeure” set forth in the contract. The party claiming force majeure must also show that the event caused their inability to fulfill their contractual obligations.
Force majeure clauses are construed narrowly. In other words, the event will usually only excuse nonperformance if the event is specifically identified in that contract’s force majeure provision. Therefore, if a contract includes “pandemic,” “epidemic,” or “global health emergency” among the list of force majeure events, the contract’s force majeure provision may allow non-performance due to the coronavirus. In addition, if the contract includes “acts of government” on the list of force majeure events, it may excuse nonperformance caused by government travel bans or shelter-in-place orders. If a contract’s force majeure provision includes neither categories of events, a party might nevertheless be able to claim that COVID-19 falls within the contract’s catchall phrases of “other reason beyond the party’s control” or an “Act of God.”
Vermont and New Hampshire’s state courts have not addressed whether a public health crisis similar to that which we are currently facing would fall within a force majeure provision’s catchall phrase. However, the United States District Court for the District of New Hampshire has noted that in determining whether a contract’s catchall phrase covers an event that is not specifically listed, courts may consider whether the event is similar to the other types of events listed in the force majeure provision. Further, the bankruptcy court in Vermont has stressed the importance of showing the causal connection between the event and the nonperformance and has noted that lack of control over the event causing the nonperformance is essential.
Force majeure provisions differ significantly from contract to contract. Therefore, careful review of your contract’s force majeure provision is necessary to determine the effect of COVID-19 on your contractual obligations. Additionally, if you would like to claim that an event of force majeure has caused your nonperformance, you must take care to comply with other relevant portions of the contract, such as any requirements for giving the other party notice.
Finally, if a contract does not include a force majeure clause, there are some common-law defenses to contract enforcement that may be applicable. For example, the doctrines of impossibility and impracticability may provide some avenues for relief. The doctrine of impossibility applies to excuse a party’s breach of contract where that party’s own performance has become impossible due to an unanticipated change in circumstances. The doctrine of impracticability reaches similar situations short of absolute impossibility. A breach may be excused because of extreme and unreasonable difficulty in performing the contract due to an unavoidable event or occurrence.
Although parties may try to invoke COVID-19 as resulting in impossibility or impracticability of performance, the bar for proving impossibility or impracticability is very high. It is a strict standard that courts are often reluctant to invoke, as the court’s remedy under the doctrines is to terminate the entire contract.
Parties should also consider invoking “change of law” provisions that may be included in their contracts. A contract may have certain remedies or procedures in place if a change in law makes it impossible or impractical to perform under the contract. At the federal, state, and local level, governments are issuing orders and changing laws daily to address the growing COVID-19 pandemic. For example, if a government issues an order suspending all non-essential travel, a party could argue that such an order represents a “change of law” under the terms of their agreement. Parties should carefully review their agreements to see if they have “change of law” provisions and what remedies, if any, those provisions provide.
Visit our COVID-19 Resource Center for more information.
The business and litigation attorneys at Downs Rachlin Martin PLLC are available to provide guidance and help on these matters. Have more questions, reach out to Mary Parent (firstname.lastname@example.org) or Marc Heath (email@example.com)