Is The COVID-19 Pandemic a Force Majeure Event?
Force Majeure (literally a “superior force”) is a contract clause that excuses a party from performing its contract obligations because of unforeseen “Acts of God.” The basic idea is that, if something unforeseen should happen outside the parties’ reasonable control that severely disrupts their ability to perform the contract, the performance is excused, the contract is not breached, and the non-performing party is not liable to the other party for breaching the contract. Such unforeseen events commonly include “Acts of God” such as earthquakes, hurricanes, tsunamis or other natural disasters, and acts of man such as war, labor strikes or terrorist attacks.
In the wake of the current coronavirus (COVID-19) pandemic and economic downturn, business owners are finding themselves faced with their own or the other party’s inability to perform their contracts.
A. What is a Force Majeure Clause and Does My Contract Have One?
A force majeure clause is defined as “[a] contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.” Black’s Law Dictionary (11th ed. 2019). A typical force majeure clause states something like this:
No party shall be liable or responsible to the other party, nor be deemed to have defaulted under or breached this Agreement, for any failure or delay in fulfilling or performing any term of this Agreement when and to the extent such failure or delay is caused by or results from acts beyond the impacted party’s reasonable control, including, without limitation, the following force majeure events: (a) Acts of God; or (b) [list other potential disasters or catastrophes] …..
Any contract clause that states this basic idea is a force majeure clause regardless of how it may be labeled.
B. What is a Force Majeure Event?
A force majeure event is something that: (1) fits the specific or general description of such an event in the contract; and (2) is consistent with the concept of an unforeseen event outside the parties’ reasonable control that disrupts their ability to perform the contract; and (3) makes it impracticable or impossible to perform the contract.
Parties to a contract can agree to just about anything that is not illegal or illusory. If your contract has a force majeure clause, it likely lists specific events that the parties agree are force majeure events, most commonly a list of events that they cut and paste from forms or previous contracts. Until now, perhaps, most parties gave little thought to deviations from this standard list that might apply to a specific contract or situation. Nevertheless, courts will enforce the plain language of the clause as written, and will treat the list as if the parties had negotiated and agreed to every word.
A force majeure clause also likely has a general “catch-all” provision following the list that adds “any other unforeseeable event beyond the parties’ reasonable control,” or words to that effect. If the parties do not agree, this language creates an ambiguity concerning the intended scope of the clause. Courts will attempt to determine their intent by looking at the contract as a whole, its purpose, and all other relevant facts and circumstances. Of course, it is much better to specifically list an event than to argue your way out of an ambiguity. Words matter!
Even if a court determines that the parties intended an event to be a force majeure event, the event must still be consistent with the general concept of force majeure; namely, that an unforeseen event outside the parties’ reasonable control disrupts their ability to perform the contract. An event is beyond a party’s reasonable control if it: (1) could not reasonably have been foreseen at the time they entered into their contract; (2) it was not caused by the fault or negligence of the nonperforming party; and (3) it could not have been avoided by prudence, diligence or care. What is foreseeable at the time they entered into the contract is in the eye of the beholder, and the beholder is usually a court making that determination.
In addition, the event must have actually caused the disruption of the parties’ ability to perform their contract. Even the most unforeseeable, unexpected and catastrophic event that mankind has ever seen will not excuse performance of a contract that is not directly impacted to the extent it becomes significantly impracticable or impossible to perform. More expense or less profit as the result of an event does not rise to the level of impossibility of performance.
C. Is the Coronavirus Pandemic a Force Majeure Event?
Some standard-form force majeure clauses specifically list public health disasters such as disease, pestilence or pandemics as force majeure events. Many do not. But even if your force majeure clause does not list these specific health-related events, a general “catch-all” provision adding other unforeseeable events beyond the parties’ reasonable control may include the event that concerns you.
Whether the coronavirus pandemic is a force majeure event, even if it is not specifically listed as one, will depend on the particular facts and circumstances of each case and, more importantly, a court’s determination of whether it and the economic chaos it has caused was unforeseeable at the time the parties entered into their contract. Most everyone can agree that no one is at fault for having caused the pandemic or that it could have been avoided with prudence, diligence and care.
Even so, the foreseeability issue in any force majeure context can be problematic. For example, a 1995 Arizona Court of Appeals decision held that the public’s fear of terrorist attacks during the Gulf War, which caused a concert to be canceled due to less-than-expected attendance, was an economic event the promoter should have foreseen at the time the parties entered into their contract.
The 2008 financial crisis is a good example of this judicial thinking. Despite the severity and breadth of the crisis, courts were not entirely sympathetic. Most courts found that the crisis was no different, at least in kind, than any other foreseeable risk of doing business, and so was not a force majeure event. Some courts, however, found that the crisis was so anomalous and unprecedented it was not reasonably foreseeable, and so was as a force majeure event. The outcome in each case turned on the particular language of the parties’ force majeure clause and the court’s (not necessarily the nonperforming party’s) opinion about what should have been or could not have been foreseen at the time the parties entered into their contract.
The coronavirus pandemic is arguably much different. The cause of the current financial crisis is external, not the result of internal market forces or manipulations that contracting parties should perhaps expect from time to time. And even if the financial crisis could or should have been foreseen, the wide swath of the pandemic’s impact, killing both people and businesses, has been extraordinarily severe and unforeseeable. No one has ever seen, or reasonably could have foreseen, the drastic shelter-in-place public health measures and mandated business closures imposed by state and federal governments to try to contain and curtail the highly aggressive and rapidly spread coronavirus. Businesses cannot bounce back from a financial crisis that has wiped out their source of income.
It is anyone’s guess, but it seems likely that, again depending on the particular facts and circumstances of each case, courts will view the coronavirus pandemic and the financial crisis it has caused as a “classic,” unforeseeable and economically devastating disaster that qualifies as a force majeure event.
D. What if My Contract Does Not Have a Force Majeure Clause?
If your contract does not have a force majeure clause or anything that looks like a force majeure clause, there are alternatives that might still excuse delay or performance. Some commercial contracts contain express contingencies that excuse performance if or to the extent a foreseeable or unforeseeable financial event adversely affects the parties’ ability to perform their contract. A financing contingency in a business purchase agreement and an adverse-condition clause in a business loan commitment are two common examples. Like a force majeure clause, such contract terms are applied as written and in accordance with what a court sees as the parties’ intent.
Even without an express contract provision, the common law (court-made case law) may provide relief in appropriate circumstances. Performance of a contact may be excused if, for some supervening reason, it is rendered impossible or extremely impracticable or if the contract’s essential purpose has been frustrated. Courts have narrowly limited and applied these common law contract defenses to cases of extreme, unanticipated hardship that, like a force majeure event, was not the fault of the nonperforming party, was not reasonably foreseeable, and could not have been otherwise avoided.
Here, too, the outcome of any particular case will depend on the particular facts and circumstances of each case and a court’s opinion about what should have been or could not have been foreseen at the time the parties entered into their contract.
As you can see, these are complicated contract issues that have been further complicated by the coronavirus pandemic and the financial chaos it has caused. It is more important now than ever to consult with legal counsel if you have questions or need guidance navigating the unprecedented, pandemic-driven financial obstacles of doing business or staying in business.
About the Author: David N. Farren is an attorney at the Phoenix law firm of Jaburg Wilk who practices employment law, contract and business disputes, and complex commercial litigation. He can be reached at 602-248-1000 or at email@example.com.
This article is not intended to provide legal advice and only relates to Arizona law. Always consult an attorney for legal advice for your particular situation.