COVID-19 has created contractual ripples that are rolling across the country and businesses should confirm their legal obligations before assuming they’re protected by a force majeure clause. Business owners should not make this assumption without first consulting with their attorney. In many instances, these clauses do not protect business owners against failure to perform contractual obligations in the midst of a pandemic.
Does Coronavirus qualify as an “act of God”? In most cases, Force Majeure would refer to hurricanes, tornadoes, floods, fires, etc. Most contracts allow parties to the contract to forego, postpone, or cancel contractual obligations when these events prevent them from fulfilling the terms of the contract.
However, most force majeure clauses are specific in their scope and the events that are covered. Because global pandemic wasn’t on the minds of most when these contracts were drawn up, there is a possibility that most businesses are not protected.
For many business owners, the events of the past months were completely out of their control. To various degrees, governments across the country closed businesses and restricted commerce. This resulted in significant supply chain disruptions and other ripples that prohibited many businesses from providing services and products for suppliers, distributors, clients, and employees.
Indeed, there are justifiable arguments that these events were beyond control of business owners. However, for business owners with “beyond control” language in their contracts, they must demonstrate that these closures and surrounding events prohibited them from fulfilling their contractual obligations.
Frustration of Purpose & Impossibility
If a business can’t claim protection under force majeure, it may be possible to apply the doctrine of frustration. Essentially, a business may be able to argue that the events were unforeseeable and uncontrollable, and created conditions that made it impossible for the business to fulfill their contractual obligations.
For example, if a supplier was unable to deliver certain critical components because of a factory shutdown thus preventing the business owner from completing and furnishing a finished product to a customer, this may be considered frustration.
This is similar to the doctrines of impossibility and impracticability of performance. Because the shutdowns were ordered by city and state governments, businesses may be able to argue that a supervening prohibition by law prevented them from performing as agreed upon in the contract. However, it is important to understand that such provisions do not excuse non-performance based on changing economic circumstances or changes in market conditions.
During these uncertain times, it is in the best interest of all parties to a contract to try to work together and do all that they can to satisfy their obligations under the contract in an attempt to avoid litigation. However, if the parties are not able to reach an amicable resolution, it is important to consult an attorney.