The term force majeure may not mean a lot to most people, and, in fact, until a few weeks ago it wasn’t something most lawyers discussed. However, the pandemic has given rise to a debate as to whether contracts can be voided by these previously unused clauses.
Force majeure refers to an unforeseeable circumstance or an irresistible compulsion. In contracts, it is normally used to refer to an ‘Act of God’. There are force majeure provisions in most contracts, especially leases, that give one or both parties a defense against being forced to perform under a contract. Usually, force majeure is defined as a fire, flood, etc. But in some contracts the language may be more ambiguous.
In these uncertain times, many individuals and companies are looking for ways to avoid performing contracts. For example, a business may not have enough staff due to layoffs or sickness to perform agreed upon work. Rather than be sued for breach of contract, they may choose to rely on the force majeure provision claiming that due to an unforeseeable event (coronavirus) they cannot perform under the contract.
What Constitutes an Act of God?
There aren’t any cases (that I could find) specifically handling the case of a pandemic, but other things have been allowed under force majeure provisions. Generally speaking, in order to claim force majeure a party would have to show four things:
- One of the events listed in the force majeure provision occurred.
- The party has been prevented or delayed from performing under the contract.
- The party’s non-performance was due to circumstances outside of its control.
- There were no reasonable steps that the party could have taken to avoid the event.
The key element here is the first one. Courts normally construe force majeure provisions very narrowly, meaning they look for the specific cause to be listed in the contract. Some contracts list ‘pandemic’ specifically, but many do not.
Just because a contract is silent as to pandemics does not mean that parties will be forced to perform under the contract.
Commercial Frustration is a doctrine whereby a party can avoid performing under a contract because performance is rendered impossible. The Doctrine of Frustration relies on the idea that parties make contracts with the assumption that certain conditions will continue to exist at the time performance is expected. These are essentially implied conditions. To prove Commercial Frustration, you need to prove two things:
- The frustrating event was not reasonably foreseeable.
- The value of counter-performance was destroyed by the frustrating cause.
Courts have applied this doctrine very narrowly. For example, courts have ruled that performance that is more onerous or unprofitable is not considered frustrated. Similarly, when the financial crisis hit in 2008, courts held that a party’s failure to secure commercial financing due to the global crisis was not a frustrating event.
What does this all mean?
I have discussed some pretty technical legal arguments, but what does it mean for individuals and businesses who are now considering trying to avoid their obligations due to the pandemic?
Unless a contract specifically states that a pandemic constitutes a force majeure, I think it will be difficult to claim that coronavirus is an Act of God, permitting a party to avoid their obligations. This is because the courts have previously ruled that for the force majeure provision to be applicable, the event must be specifically listed in the provision.
In the event that ‘pandemic’ is specifically listed, we would need to consider the other elements. Has the party been prevented from performing? Was it due to events outside of their control? Were there any reasonable steps that could have been taken to avoid this?
Let’s consider an example: Let’s say that you owe a restaurant that rents out its space for events. The governor has ordered that you close. Does that count as a force majeure under your contract to allow you to not perform your end of the contract (assuming the people still want to have their event)?
Assuming your contract has a force majeure provision that cites pandemic as a cause for non-performance, I think you would have a legal basis to not perform under the contract. The governor has prevented you from performing under the contract, it was due to events outside of your control, and there were no reasonable steps that you could have taken to avoid this non-performance.
What if there was no force majeure provision citing ‘pandemic’? I still believe that you could avoid performing under the doctrine of Commercial Frustration. Probably.
If you signed an agreement last October to host this event, then certainly the two elements are met. The frustrating event was not foreseeable, and the value of performance was destroyed by the pandemic. No one expected coronavirus would cause this trouble back in October, and hosting a party where no one is allowed to attend would not provide value.
However, if that contract was signed in March, I would argue that frustration may not exist. Coronavirus was a foreseeable problem in March so courts may not be as forgiving to a party who doesn’t perform. In the end, it’s hard to tell.
The main issue is that we don’t know for sure what courts will do. There aren’t many cases that handle these doctrines, and a pandemic is an unprecedented issue. If you would like to discuss this further, please feel free to call or email me. This is a complicated topic with complicated fact patterns that are specific to each client.