COVID-19 has interrupted commerce on a scale unprecedented in modern times. A great deal of talk centers on whether the COVID-19 pandemic is an “act of God” excusing contractual performance: specifically, whether force majeure excuses a party’s performance due to COVID-19.
Applying force majeure is a grey area of law. Although many contracts contain force majeure clauses, such clauses have generally been afterthought, included as standard legal language. Force majeure has not been litigated much in our postwar economy. Attorneys are dusting off 19th century case law to gain a better understanding of applying precedent to our novel COVID-19 pandemic.
A common definition of force majeure is “a superior or irresistible disrupting force in business and insurance law”; wherein, when business is disrupted due to a factor beyond the contracting parties’ control. Black’s Law Dictionary Online, 2nd Ed.
Before you add force majeure to your Zoom happy hour repertoire or tell your landlord this fancy Latin phrase excuses you from paying rent, let’s examine what exactly force majeure entails.
Force majeure is a legal theory from contracts law. Under Washington contract law, a force majeure clause “provides a complete defense to liability if one party is unable to perform its obligation under the contract because of circumstances outside its control.” A force majeure clause “provides a defense to liability when a party is required to perform, fails to do so, and that failure is caused by a strike or other event within its* scope” [*within the scope of the force majeure clause]. Hearst Communications, Inc. v. Seattle Times Co., 154 Wn.2d 493, 507, 115 P.3d 262 (2005) (emphasis added).
You cannot “declare” force majeure like you can “declare” bankruptcy (cue the Michael Scott reference); unlike bankruptcy, you cannot file for force majeure. Many contracts, however, have a force majeure clause. Often it is a small paragraph several sentences long near to the end of the contract, by paragraphs that say “severability” and “governing law.”
It is essential to understand that force majeure cannot be used to excuse contractual performance simply because you experience economic hardship. A contract’s force majeure clause contemplates excusing performance due to an unforeseeable event that makes the contract impossible or impracticable to perform. A body of contract case law makes clear that a business downturn alone does not excuse a party’s breach of contact. An economic downturn is always foreseeable; economic hardship is a risk contracting parties should have factored in.
In contrast, COVID-19 was arguably an unforeseeable event contracting parties did not take into account. In this context, the event that makes a contract impossible or impracticable to perform is called a triggering event. Here, COVID-19 would be considered the triggering event that made a contract impossible or impracticable to perform.
Consequently, force majeure’s application depends on whether COVID-19’s unforeseeability made a contract impossible or impracticable to perform. Just because your performance became more difficult due to COVID-19 does not cut it: your performance must have become impracticable or impossible. You must show specifically how COVID-19 prevented you from fulfilling your contractual obligations.
If your business was deemed non-essential and forced to close per a gubernatorial “stay at home” order, you may have a stronger argument for exercising force majeure if that government order directly impacted and/or prevented the operation of your business.
In the neat and tidy world of legal theory, this is the point where you would review your contract’s force majeure clause, provide the other party notice that you are exercising force majeure and, if a dispute arose, everyone would trot off to court and have a judge resolve the matter.
Obviously, we do not operate in that world. Courts are barely open and prioritizing domestic and criminal matters; businesses are hemorrhaging cash; people want help – and answers. In that vein:
Review your contract’s force majeure and notice clauses. If you are going to breach your contract, then provide the appropriate notice. Courts take notice provisions very seriously. Providing proper notice may help in subsequent court proceedings. Obtaining an attorney’s advice and counsel would be prudent, especially to preserve contract rights and minimize legal fallout.
Try to mitigate damage with alternative solutions. The commercial landlord-tenant relationship is a prime example. Notwithstanding gubernatorial and municipal (temporary) moratoriums on evictions, commercial landlord-tenant law is unlikely to be fundamentally altered by COVID-19: landlords possess property rights and are still entitled to rent payments.
Communicate with your landlord. An alternative solution may be more appropriate, such as an interim payment plan, rent forgiveness, or a combination of both. Commercial tenants – especially long-term tenants – may become more of a commodity if economic conditions continue to worsen.
Create a paper trail. Document your damages since the COVID-19 economic downturn; put “handshake agreements” in writing, even if it is an email after-the-fact; communicate with insurance providers, landlords, creditors, and government agencies. While some documentation could be discoverable, the benefits of knowing your business’s financial picture outweigh the risks. Also, your CPA will thank you.
Finally, get quality legal advice. Not Creed’s.
If you have any questions concerning this article, COVID-19, or inquires about obtaining my legal services concerning your contractual rights and obligations, please feel free to contact me at firstname.lastname@example.org. Please remember the above-article does not constitute legal advice, nor does it create an attorney-client relationship.