Force Majeure and Coronavirus: Can Small-Business Contract Non-Performance Be Excused?
The arrival of the Coronavirus in the U.S. has resulted in school shutdowns, national and state emergency declarations, and the quarantine of millions of Americans. And it’s only March 17th!
Some localities, including Los Angeles and the entire State of Michigan, have mandated the closing of all restaurant dining rooms and bars. What’s obviously clear is that more restrictions, closures, and quarantines are certain to follow. See the City of San Francisco as an example.
Undoubtedly, the health and safety of everyone, especially our elderly, is first priority.
Secondarily however - the economy - is not something that should be ignored. What’s become clear is that independent contractors, freelancers, and businesses of all sizes will begin to suffer. Even mister market optimist – President Donald Trump - went as far as saying that we may be headed for a recession. That’s Bigly.
Economists are predicting that job losses, cashflow shortages, and layoffs will become common place. People simply won’t be able to keep up with their bills and other financial obligations. Part of the government’s strategy to combat this seismic issue has already began to unfold.
Certainly, existing contractual obligations – whether with credit card companies, vendors, clients, lenders, landlords, or employees, just to name a few – will be broken. This is disappointing across the board.
Small businesses, the lifeline of all local communities, might also begin asking very important questions:
(1) Do they have to pay for goods or services pursuant to written contracts while they are closed? What about rent?
(2) Conversely, do they need to deliver on their promise to provide goods or services if they are unable to perform?
The answer is: it depends, and your Force Majeure clause might have some answers.
This may be the first time you’ve heard of Force Majeure because it’s typically buried deep in the boilerplate language of contracts. To non-attorneys, you might think of boilerplate language as copy and paste legalese. To attorneys, it’s much more than that – it’s language that is so fundamental and important that we include it in almost every contract.
What is Force Majeure?
Force Majeure is a clause found in most contracts, usually part of the “boilerplate language.”
Force Majeure clauses are contract provisions that excuse a party’s nonperformance when extraordinary events prevent a party from fulfilling its contractual obligations.
Force Majeure clauses typically define occurrences that are outside and beyond the control of the parties (acts of God, war, famine, and plague), and allows relief for non-performance in the event that such an occurrence is triggered.
The possibility of the virus triggering a Force Majeure event increases as the Coronavirus continues to spread.
Importantly, even though Force Majeure clauses are found in contracts across all industries, there is no universal definition. Parties will have to carefully review their contracts to get a sense of where they might stand.
Some definitions might be narrow and closed, meaning there is a specific list of events that constitute Force Majeure, while others might be open and broad, subject to further analysis.
Moreover, a contract might spell out what happens in the event of a Force Majeuer event. Although typical language might excuse non-performance, it might say something different. For example, it might require performance notwithstanding a Force Majeuer event, or require that proper notice be provided in order for non-performance to be excused.
Again, to be clear, the specific wording of each clause must be considered on its own merits, and there is often more stringent analysis beyond a cursory plain language review. This could involve assessing whether there was one sole effective cause for the non-performance, whether there were alternative methods of performance, whether other reasonable measures were taken to mitigate the non-performance, whether proper notice is required and provided, as well as a litany of other possible issues to explore before reaching any conclusion. The facts, circumstances, and relationship-dynamic between the parties is also something that needs to be taken into account.
The risk of wrongfully declaring a Force Majeure event when you are not contractually entitled to do so will ultimately mean that you are in breach of contract. Thus, caution should be taken when relying on Force Majeure.
Given the current climate, the hope is that everyone is willing to be understanding, patient, and flexible with each other. Clear lines of communication, reasonableness, and empathy go a long way here.
Unfortunately, if parties cannot find a mutual resolution on how to delay or excuse non-performance, it will be natural law for each side to dig their heels into an interpretation that benefits them the most. This typically does not result in a good outcome for anyone. As a result, business litigation over the application of Force Majeure is likely certain, especially where the stakes are high.