COVID-19’s Potential Impact on Contracts—Force Majeure and Related Concepts

With the global spread of COVID-19, businesses face challenges few have previously experienced. Many are grappling with the question, “What should we do when a business partner does not perform under a contract because of the pandemic?” Some might be simultaneously asking, “What can we do if we cannot meet our contractual obligations because of COVID-19 precautions and interruptions?” The answers might lie in whether there is a force majeure clause in the governing contract.

Often included as boilerplate language, force majeure clauses are (thankfully) seldom triggered, but current conditions have elevated their importance. From French, force majeure means “a superior force” and refers to an event or effect that can be neither anticipated nor controlled, including both acts of nature and people. The concept is sometimes referred to as an “act of God.” Generally speaking, a force majeure clause allocates risk when performance is impossible or impracticable because of external factors.

We provide below an overview of general principles that apply to the invocation of force majeure clauses, followed by some specific observations.

General Considerations

• Does your contract have a force majeure clause? Generally, force majeure clauses excuse performance or permit delayed performance under a contract if the non-performance or delayed performance is caused by an unexpected occurrence outside of the parties’ control. In assessing obligations due under a contract, you should first look for a force majeure clause.
• What are the circumstances triggering a force majeure clause? Force majeure clauses might specify or list types of events that will excuse performance. You should determine whether a pandemic or government actions (if your local or state government has instituted COVID-19 related regulations) qualify as force majeure events under your contract.
• Are there other relevant contract provisions? If your contract has a force majeure clause, courts will likely require that you comply with any limitations or related clauses in the agreement. For example, a contract might require immediate written notice to the other party if a party believes performance is impossible by reason of force majeure. A contract, in turn, might mandate additional negotiation or good-faith cooperation to identify alternative terms of performance. If either party assumed the risk of an event like the current pandemic, courts likely will uphold the parties’ prior allocation of risk. You should also check to see if your contract allows for delayed performance, but not fully excused performance, due to force majeure.

  Some contracts are expressly subject to state or local laws and orders, or to the directives of a third-party governing body. Consider whether such provisions may excuse performance by virtue of requiring compliance with governmental or third-party regulations relevant to COVID-19.

• What law governs the contract? The specific law governing your contract will determine the scope and enforceability of a force majeure clause. For example, many force majeure clauses excuse performance if an act of God interrupts performance. You should analyze case law in the governing jurisdiction to determine what constitutes an act of God and the relevant principles and factors for evaluating the application of a force majeure clause. The strength of an argument that the COVID-19 pandemic qualifies as an act of God will vary by jurisdiction.
• Has the pandemic—as opposed to something else—in fact caused the non-performance? A court will consider whether the non-performing party was on track to satisfy its obligations in the absence of the COVID-19 pandemic. A court might ask the question, “But for the COVID-19 pandemic, would the non-performing party likely have been able to perform?” If not, a force majeure clause will be far less helpful in avoiding contractual liabilities. A court might also consider whether illness-related absences or COVID-19 related governmental orders, as opposed to a contract party’s internal policies responsive to the pandemic, caused the non-performance. A force majeure invocation generally is stronger if it is based on external factors as opposed to factors within the control of the non-performing party. But contracting parties must be mindful of the standards of care that businesses owe to customers and employees. Internal policies that mitigate the risk of contracting and spreading COVID-19 might disrupt performance, but they also may be necessary to ensure the safety of customers and employees and avoid potential tort liability.
• Was the event of force majeure foreseeable? Some courts will analyze whether the claimed force majeure event was foreseeable to determine whether performance was excused. The more reasonable it was for parties to have contracted around the force majeure event, the less likely these courts are to enforce a more generally worded force majeure clause. This is an important consideration for those assessing contracts entered into after the novel coronavirus began to spread.
• What performance does the event of force majeure excuse? Some contracts specify the obligations that will and will not be excused based on an event of force majeure. For example, a contract may expressly designate certain amounts paid as non-refundable, or impose different relief depending on how long the event of force majeure lasts. You should closely analyze the force majeure clause in conjunction with other contractual provisions to identify the performance excused by the event of force majeure.
• Is some form of substitute performance available? Generally speaking, all parties to a contract have a common law duty to mitigate damages in the event of non-performance. All parties to a contract should consider whether some form of substitute performance might mitigate the hardship caused by the event of force majeure. Is an event postponement, as opposed to cancellation, feasible? Might a partial shipment of widgets temporarily suffice until a larger, supplementary shipment arrives? In agreeing to alternative performance a company should expressly reserve and refuse to waive all available rights and remedies.
• Is performance excused by an affirmative defense of impracticability of performance or frustration of purpose? If your contract does not contain a force majeure clause, a party might still be able to raise an affirmative defense of impracticability of performance or frustration of purpose if the pandemic prevents full performance. Courts approach these defenses differently, so you should analyze these defenses in your particular jurisdiction.

  As a general matter, a party’s duty to perform is discharged “[w]here, after a contract is made, [the] performance is made impracticable” without the fault of the non-performing party, due to an event that the parties assumed would not occur at the time of contracting. Restatement (Second) of Contracts § 261 (1981). While most jurisdictions do not require objective impossibility of performance to sustain the defense, the breaching party must be able to show that performance was rendered extremely and unreasonably difficult. See id., cmt. d. An increase in difficulty or expense will not support the defense unless it is at least “well beyond the normal range.” Id. Note that courts do excuse performance that is rendered impracticable by a law, regulation, or order promulgated or amended after the contract was made. Id. § 264.

  Similarly, courts will often excuse performance where “a party’s principal purpose” in contracting “is substantially frustrated without [the party’s] fault” by an event that the parties had assumed would not occur. Id. § 265. As with the impracticability defense, the frustration must be substantial—not just the result of moderately increased expense—and not subject to mitigation by reasonable efforts. Id., cmt. a.

  The “frustration of purpose” defense might be applicable to contracts indirectly affected by the COVID-19 pandemic. For example, a party that contracted to rent space or receive party and other catering services for NCAA basketball tournaments might consider raising the defense to excuse non-payment (following proper notice) given that the NCAA cancelled its tournaments due to the spread of COVID-19.

• What are you doing to communicate clearly with your contracting parties? Clear communication with contracting partners is critical during this uncertain time. Documentation of communications likewise is important. Creating a clear record is important for memorializing the agreed course of performance. And just as important, clear and open communication is critical to maintaining smooth, beneficial relationships into the future.

Construction-Specific Considerations

In the construction arena, many of the industry standard forms and non-standard forms contain provisions allowing a contractor, subcontractor, or supplier additional time to perform (but not additional money) following the occurrence of a force majeure event. Such events are often specifically defined to include acts of God, other causes beyond the contractor’s control, or acts of the government. Depending on the specifics of the relevant provision and the type of performance at issue, the first two categories might be triggered by the occurrence of the COVID-19 pandemic itself, while the last category (governmental acts) might be implicated to the extent that government-ordered quarantines or restrictions on travel impact a party’s ability to perform.

But the analysis does not end with whether a pandemic meets the contractual definition of a force majeure event. Rather, the next question is typically whether and to what extent—under a “critical path schedule analysis”—the pandemic is actually the cause of a delay to a contractor or supplier’s ability to meet a contractually mandated deadline. This analysis, which is highly fact-bound and project-specific, will likely involve first comparing the planned dates for the occurrence of critical path events with the actual or revised forecasted dates of critical path events and then analyzing how the change in those dates was impacted by the virus relative to other potential causes. In other words, the analysis will involve determining what was the cause of the delay—was it the pandemic or was it some other circumstance separate from the pandemic? In many cases, this analysis may be straightforward. In others, it may require analysis by a construction scheduling and delay expert in close coordination with legal counsel. Persons and firms involved in a project—owners, contractors, suppliers, and designers alike—should NOT assume that the pandemic creates an open-ended construction calendar. All parties will be required to exercise reasonable mitigation measures and avoid non-pandemic-related delays.

Business Interruption Coverage Considerations

Businesses might look to insurance coverage for losses from the halt or slowdown of business operations. Many businesses purchase business interruption insurance to cover such losses, including lost revenue, utility costs, and other expenses resulting from the interruption. Unfortunately, most business interruption insurance policies require the interruption to be caused by some kind of physical damage to insured property (e.g., harm caused by a hurricane, flooding, or some other “peril” defined under the policy). We might very well see litigation over whether contamination or potential contamination of real property with a virus constitutes damages to real property in order to trigger the coverage as a result of this pandemic.

Additionally, some standalone types of business interruption policies provide coverage when the interruption is caused by orders from a civil authority—for example, when a government entity denies access to covered property. The general intent of civil authority interruption policies is to extend business interruption coverage to include situations where a civil authority prohibits access to the insured’s property, when nearby property is physically damaged because of a covered peril, but the insured’s property is not damaged. An example of when such a policy might apply is when a wildfire is burning and a fire department restricts access to roads as part of its firefighting efforts. Such policies typically include very specific requirements for coverage to attach and must be examined carefully. One thing to keep in mind is that the such policies often include notice requirements that insurers strictly enforce.

Additional information about insurance coverage related to the pandemic is available here.

If you have questions about how this information affects your business, contact one of the attorneys listed below.

Litigation Contacts:	Construction & Design Contacts:	Insurance Contacts:
Anne Dorshimer (Associate) Hunter Ferguson (Partner) Jeremy Sacks (Partner) Samantha Sondag (Associate)	Zachary Davis (Associate) Andrew Gibson (Partner) Eric Grasberger (Partner)	Louis Ferreira (Partner) Guy Thompson (Associate)