By David M. S. Shaiken
What happens when unforeseen events, such as the Covid-19 pandemic, make it impossible to perform a contract? Are parties bound by the contract anyway? Is the contract terminated?
The general rule is that if unforeseen events make performance of a contract impossible, then the parties are excused from performing their contractual obligations. If there is no clause in a contract that says what happens if a contract becomes impossible to perform, then it is up to a court to decide whether to excuse performance. Like most commercial litigation, such lawsuits are time-consuming and expensive.
As a result, many contracts contain a clause called the force majeure clause. In French, “force majeure” means superior strength. Typically, a force majeure clause sets out by agreement of the parties what extraordinary events, such as acts of God, war, riots, labor strikes, etc. would excuse a party from performance. If the parties have included a force majeure clause in their contract, then the occurrence of an event that is not enumerated in the clause might not excuse a party from performance, on the theory that if the parties had intended the particular event to excuse performance they would have said so in their contract. Therefore, these clauses should be drafted with care.
Many contracts that were negotiated before the Covid-19 pandemic do not specify pandemics as a force majeure event. As a result, a party might not be excused from performance even though the pandemic has made it impossible to perform. Courts will be grappling with this issue in the Covid-19 era.
What about force majeure clauses that state that acts of God excuse performance? An economic downturn is not an act of God. Some courts have held natural phenomena, like hurricanes, to be acts of God that excuse performance. Ultimately the courts will have to decide whether the pandemic is considered an act of God. At present, courts have reached differing conclusions during the past few months.
It is not sufficient simply to insert the word “pandemic” into a force majeure clause. The clause should specify where the pandemic has to occur in order to be a force majeure event, who decides whether a pandemic exists in the relevant locale (World Health Organization? U.S. Centers for Disease Control and Prevention? A state public health department? Any of these?), and whether the pandemic must be accompanied by a government-ordered shutdown of business activity.
Suppose a force majeure clause specifically covers pandemics, or government-ordered shutdowns, and does a good job of defining how to determine whether a pandemic has occurred in the locality where performance is to take place. What happens then? A well drafted contract will specify who is liable for what, who is excused from performance and the duration of any permitted suspension of performance if a force majeure event occurs. In other words, the contract can allocate the risk of an occurrence of a force majeure event.
In commercial and retail leases a force majeure event will not necessarily abate a tenant’s monetary responsibility to pay rent. Thoughtful consideration must be given to whether such an event has resulted in a full or only partial inability to perform. For example, when the capacity of bars, restaurants, movie theaters and gyms have been reduced, but the businesses remain open, are they fully or only partially excused from performance? This is another example of circumstances that can be covered in the contract.
The pandemic has made it clear that businesspeople should not consider force majeure clauses to be unimportant boiler plate language. Rather, in a contract of any economic consequence, parties should consider the force majeure clause carefully, and actively negotiate its terms. While the presence of a good force majeure clause may not prevent litigation, at a minimum thoughtful negotiation of the clause can strengthen a party’s negotiating position if a force majeure event occurs, and strengthen its position in the event of a lawsuit.
For more information contact David Shaiken (860-606-1703), david@shipmanlawct.com.