COVID-19 and Force Majeure Clauses

By Vickie A. Gesellschap

           Many businesses throughout the southeast and the country are struggling with the constant changes brought by COVID-19. One particular area that is of concern is whether the business can cancel a contract, whether employment or otherwise, that it feels it cannot perform due to the hurdles presented by the pandemic and resulting governmental edicts. Or, the opposite, what to do if the other party to the contract wants to terminate or suspend the contract? In many cases, the contract provision on which to focus, is the one setting forth the parties’ rights if a “force majeure” event occurs. Force Majeure, in general terms, is an event which was unforeseeable and has rendered performance of the contractual obligations impossible or impracticable. (Note: Florida courts have allowed the enforcement of force majeure clauses which expressly provide for events which do not necessarily render performance impossible, and even those which are foreseeable in some cases. Obviously, decisions of courts of each state must be evaluated to determine the specific nuances of how such clauses are interpreted by those states’ courts) In addition to the force majeure clause itself, we must also look at the procedural requirements to invoke the clause, as well as the remedies available to the parties set forth in the contract. Beyond the contract considerations are the external facts surrounding the issue, such as governmental actions, environmental conditions and how those events have affected performance of contractual obligations.

           The first step to determining applicability of a force majeure clause, however, is to identify the actual triggering event that led to a party’s inability to perform its obligations under the contract. If examining this in 2020 during the COVID-19 pandemic, you must determine if it was the virus itself that was the reason performance was or is impossible, or was it the result of compliance with a governmental order, law, regulation or guidance, which prevented performance? Next, did the identified event render performance impossible, impracticable or just inconvenient? Mere inconvenience in performance is not sufficient to invoke the clause. Alongside this analysis, examine whether the party attempting to invoke the clause could have or did make efforts to avoid non-performance, or otherwise mitigate the non-performance. Last, is an examination of the remedies available to the parties. The exact language of the force majeure clause is key in enforcing the provision, especially so when determining whether it is applicable to COVID-19 disruptions. Force majeure clauses are typically silent regarding pandemics. A handful expressly exclude pandemics as a basis for invoking the clause and even fewer expressly include it as a basis for invocation.

In our current times, the pandemic of COVID-19 is not typically the direct causal reason for inability to perform obligations under the contract, but rather adhering to governmental orders, regulations, rules and/or guidelines have placed businesses in the precarious position as to whether they must perform or are excused from performance. If the force majeure clause does not expressly address pandemics, it very well may include “governmental acts” as a basis for invoking the clause. Unfortunately, most force majeure clauses do not expound on what constitutes an “act.” Therefore, it is unclear if the CDC’s guidance on social distancing is sufficient to trigger the clause, or whether it must it be a formal act of law, i.e. Executive Order, legislative directive or agency regulation which prohibits a party’s performance.

Another issue which varies greatly in contractual force majeure clauses is the remedy available to the party invoking the clause. Most force majeure clauses simply suspend performance until the effects of the triggering event have passed and performance may resume. Force majeure clauses rarely allow immediate termination of the obligations under the contract, however many are drafted so that if a certain amount of time passes after the triggering event and before performance is possible, the party unable to perform may terminate the contract. If a business finds itself in such a position, it should be certain to review the notice of termination provisions of the contract carefully to ensure compliance.

Unfortunately, there is no clear-cut answer to whether COVID-19 is a force majeure clause triggering event. Parties to contracts must examine the contract language closely, and in conjunction with governmental orders and guidelines prior to attempting to invoke the clause. But remember, once this pandemic is over business will return to normal and the same parties will be in contract with one another again, so tread lightly. Sometimes the benefits of maintaining good will with business partners is worth the pain of working through these issues together. It does not have to be an all or nothing game, contract amendments allowing for the parties to perform their obligations under the contract are the best vehicles to continue business during these times, rather than invoking typically ambiguous provisions which require examination by attorneys and judges.

Vickie Gesellschap is an attorney at Sniffen & Spellman, P.A. , in its Pensacola, Florida office. She may be contacted at [email protected].