As of March 19, the Centers for Disease Control and Prevention reports there are more than 10,000 cases of novel coronavirus (COVID-19) in the United States, including more than 4,500 in New York state alone. Declared a pandemic by the World Health Organization on March 11, the rapidly-spreading virus has caused severe worldwide disruptions. In addition to monitoring and responding to the public health impact on workers and consumers, businesses should also consider the effects of the coronavirus pandemic on existing contracts.
In cases where the coronavirus—or the government’s response to the coronavirus—has rendered performance of a contract impossible, one of the parties may seek to invoke a force majeure clause to excuse nonperformance. “Force majeure” generally refers to an unforeseen event beyond the control of either party, such as a natural disaster or “act of God,” war, terrorism, civil unrest, government action, work stoppage, disease, epidemic, pandemic or other public health crisis. The specific events triggering a force majeure clause are listed in the contract. Importantly, force majeure may be invoked only if the agreement contains a force majeure provision. Now is an ideal time for any business to review contracts that may be impaired by the continuing spread of coronavirus to determine whether they contain such provisions and, if so, whether the outbreak qualifies as a force majeure event.
Courts have historically discouraged reliance on force majeure provisions, and have strictly construed contracts in favor of performance. But because COVID-19 is a pandemic with unprecedented ramifications, the landscape regarding force majeure is likely to rapidly evolve. A party seeking to invoke force majeure is required to establish (1) the occurrence of a force majeure event beyond that party’s control; (2) that the force majeure event has prevented the party’s performance; and (3) that the party has taken all reasonable attempts to avoid or mitigate the event or its consequences. A party may not rely on force majeure where it could have mitigated the nonperformance, or where performance is merely more difficult or unprofitable, but still possible. Some opportunistic parties might use the pandemic as a pretext to avoid contractual obligations. No matter how the law evolves, courts will not view such behavior favorably.
If a force majeure provision contains no reference to an outbreak, epidemic, pandemic, or the like, a party may find it difficult to rely on force majeure to excuse nonperformance due to the coronavirus. In some jurisdictions, the COVID-19 pandemic may be considered an “act of God” or “disaster,” but the law is far from settled on this point and different jurisdictions will likely arrive at different conclusions. The list of force majeure events also often includes government action, orders, or regulations. Such language could allow a party to invoke force majeure where a governmental decree has rendered performance impossible. For example, imagine that the owner of a nightclub has entered into a contract with a musician to perform at the venue on a particular evening. If the government subsequently orders that all nightclubs must close until further notice (as has occurred in several states and municipalities in response to the coronavirus pandemic), performance would be rendered impossible. Assuming the contract lists official government action as a force majeure event, either party may be able to invoke the clause.
The list of force majeure events might also contain a catchall such as “any other event outside the parties’ control.” Given the courts’ preference for interpreting contracts as enforceable, any party hoping to rely on a catchall provision should proceed with caution. In the past, Courts have been unwilling to extend catchall phrases beyond the boundaries of the specific events listed in the force majeure clause. But as noted above, this area of the law may develop rapidly in the wake of the coronavirus pandemic, and businesses should prepare for the possibility that courts might interpret force majeure provisions more liberally in the circumstances. The application of force majeure provisions may vary by jurisdiction or choice of law provisions contained in a contract.
What if a party is unable to perform its contractual obligations but the contract does not contain a force majeure provision? Be aware that attempting to invoke force majeure without a contractual basis may constitute breach of contract. Yet a party in this unfortunate position could still have legal recourse. Some jurisdictions, including New York state, provide for a defense of impossibility in certain situations where the performance of the contract is rendered objectively impossible by an event that is truly unforeseen and could not have been guarded against in the contract. Other jurisdictions provide a similar defense where performance is merely impracticable, although New York state does not (with rare exceptions, such as transactions under the Uniform Commercial Code).
Another potential defense in the absence of a force majeure clause is frustration of purpose. This doctrine focuses on the objective of the contract, rather than the ability of the parties to perform. For example, suppose that a business leases a building to operate a retail store. If the building is destroyed due to events beyond the control of either party, the business could invoke frustration of purpose to excuse nonperformance. The business is capable of performing by making its lease payments, but the subject of the contract no longer exists.
