Force majeure refers to an event that:
1) is outside a party’s reasonable control and
2) prevents that party from performing its obligations under a contract.
A party’s ability to claim relief for a force majeure event typically depends upon the terms of the contract and any specific force majeure provisions in that contract (a “force majeure clause”). A party affected by force majeure will likely be relieved from performing the relevant obligations for as long as they are unable to do so.
The “test” for force majeure usually requires the satisfaction of three distinct criteria:
- the event must have been beyond the reasonable control of the affected party;
- the affected party’s ability to perform its obligations under the contract must have been prevented, impeded or hindered by the event; and
- the affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences.
The extent to which a party’s ability to perform its obligations were “prevented, impeded, or hindered” can vary significantly based on your contract terms and your jurisdiction. In some jurisdictions (like Pennsylvania) you are expected to perform your obligations under a contract as long as you are able to, even if it would cost you money. If a governmental order would make it illegal for you to perform your obligations, however, a force majeure clause would likely be triggered.
Depending on your circumstances and exactly what the force majeure clause of your contract says, you may be able to cancel the contract entirely. However, it is more likely that exercising your options under the force majeure clause will just put your obligations “on pause” until you are able to resume operations. Force majeure clauses will also typically only allow you to suspend the portion of the contract that is affected by the force majeure event. Typical force majeure clauses do not allow you to suspend or cancel the entirety of the contract.
The force majeure clause in your contract may also set forth different obligations you will have to undertake if you choose to exercise the clause. For example, you may have to notify the other party as soon as possible, or cover the other party’s losses.
If your contract does not contain a force majeure clause, it may contain other, more general provisions that allow you to renegotiate the terms of a contract if you are under “hardship.”
Furthermore, non-performance of your obligation arising out of the contract may still be excused due to the common law doctrines of impossibility, frustration, and impracticality:
- Impossibility exists when wholly unforeseeable events make performance “impossible,” in which case nonperformance is excused. Change in market conditions or economic hardship won’t be enough. It must objectively be impossible.
- Frustration of Purpose exists when the parties’ primary purpose for entering a transaction is frustrated by an unpredictable event that destroys the basic foundation of the parties’ agreement.
- Impracticality exists when performance of a duty is excused when the duty has become unfeasibly difficult or expensive for the party who was to perform. This is different from impossibility. Here, performance is physically possible. However, it would be extremely and unreasonably burdensome for the party whose performance is due.
In Pennsylvania and most other U.S. jurisdictions, parties are excused from their obligation to deliver goods in a timely fashion if there are unforeseeable conditions (such as a global pandemic which gave rise to a ban on non-essential business activity) that make it impossible or extremely difficult to do so. Depending on the exact circumstances, your obligations could be delayed or cancelled for the duration of the Covid-19 pandemic.
Force majeure provisions only apply when conditions make it impossible to fulfill an order. For example, a Pennsylvania factory that makes non-essential goods will likely be able to delay their obligations under a contract until the ban on non-essential business activities is lifted. However, a graphic designer who was contracted to develop a logo for your company and has the ability to work from home would likely still have to fulfill their obligations.
As a first step, we always encourage our clients to have a conversation with the other party to their contract. Business is about relationships and presumably you and the other party want to continue to have one after the pandemic has cleared. That should incentivize both parties to work together to reach a solution.
Recently, for the first time in the United States, the United States Bankruptcy Court for the Northern District of Illinois in In re: Hitz Restaurant Group ruled that a force majeure clause excuses nonperformance of contractual obligations resulting from business closures mandated by government regulations that aim to prevent the spread of Covid-19.
First and foremost, you should comply with the notice requirements of the clause. Failure to do so may prevent you from getting the relief that you are seeking. For example, notice requirements of the provision may specify the form of notice required, to whom it should be sent, the manner of transmission and the level of specificity concerning the triggering event and why it applies. Under current conditions, if it has also become hard to fulfill the notice requirements, we suggest you contact the other party and communicate with them about your situation while being reasonable.
A force majeure clause can be located in multiple locations in a contract. It can either be a standalone provision, as its own sections, or it can be found in an “impossibility” provision or in a termination provision. If your contract already has a force majeure clause, then you should check whether it already accounts for a pandemic, an epidemic and/or government orders. If it does not, you should add that language by revising the agreement. If you’re drafting a new contract, we suggest that you add a standalone provision for all COVID-19 related issues including a force majeure clause and make sure the force majeure clause is in harmony with the rest of the agreement.