Due to COVID-19, many businesses are either shut down entirely because of government restrictions or are experiencing reduced revenues as customers and employees try to adjust to new working environments. Because of the immense amount of lost work, many businesses must determine if their staff will be able to complete current contractual obligations. For businesses that are not going to be able to meet contractual obligations because of COVID-19 related issues, the force majeure clause is a potential way to avoid costly legal battles. Below, is an introduction to force majeure, what businesses must consider before invoking this clause, and options available to businesses who cannot utilize force majeure.
General Information about Force Majeure Clauses
A force majeure clause is a contractual provision that excuses one or both parties’ performance obligations. However, this clause can only be utilized when situations arise which are beyond either of the parties’ control and make the contractual obligations impractical or impossible to complete.
Force majeure events normally listed in contracts include:
- acts of God, such as severe acts of nature or weather events including floods, fires, earthquakes, hurricanes, or explosions;
- war, acts of terrorism, and epidemics;
- acts of governmental authorities such as expropriation, condemnation, and changes in laws and regulations;
- strikes and labor disputes; and
- certain accidents.
Economic hardship experienced from an event or occurrence not mentioned in the above list can almost never invoke a force majeure provision on there own.
The specific language of a contract—and state laws where the contract was entered into—ultimately determines whether one party can successfully invoke a force majeure clause. In most instances, the ruling on force majeure provisions does not have an expansive meaning. Instead, this clause has been confined to the aforementioned list or other matters that have the same essence as what is mentioned. When interpreted in this fashion, force majeure clauses act as a way to limit potential financial damages or hardship. However, this only applies when circumstances outside both party’s control lead the contract to become unmanageable.
Each party can use state laws to invoke force majeure if the contract defines this provision in the agreement. If so, the discussed principles will be used to decide if the provision is applicable.
What to Consider Before Invoking Force Majeure
If COVID-19 has brought your company substantial hardships and you are considering using a force majeure clause, ensure that you read over the contract you desire to break before invoking this provision. In certain agreements, the filing party must give the other party notice in advance before using the provision. If the party does not adhere to these rules, the right to use the clause will be forfeited.
There are two more important pieces of information to consider before invoking a force majeure clause because of COVID-19. The date of the agreement and the recent state of the business relationship. First, the coronavirus pandemic will give businesses a strong case to invoke the force majeure clause. However, this case will be nonexistent if the contract you enter into began after the coronavirus outbreak. Secondly, businesses that invoke this provision must show that they attempted to perform their contractual duties during the pandemic. Showing that your business attempted to complete work does not mean that you actually need to complete any work. However, it must be shown that you at least tried to logistically figure out how to complete your duties.
Options in lieu of Force Majeure
There are other legal options available to your business if you are unable to utilize force majeure. The first way to remove your company from a contract is to use the claim of impossibility and impracticability. The Uniform Commercial Code (UCC) has guidelines that allow a seller to remove themselves from executing a contract. However, this is restricted to contracts when completing this performance has been made impracticable by an unforeseen event. The event must create a situation where it is either impossible or impractical to complete the contract. Furthermore, this inability to complete must be from extreme and unreasonable difficulty, expense, injury, or loss involved.
As the United States has imposed lockdowns throughout the country, this clause may be of great help to business owners. One can use this clause to nullify a contract because it would be impossible or impracticable to complete the agreement. This claim is even more supported in states that required all bars and restaurants to shut down. Similarly, other businesses that are restricted or shutdown will be able to use this impossible or impracticable clause.
When you are not able to invoke either of the previous clauses, frustration of purpose is another available option. Frustration of purpose is applicable to companies where an event or change occurs that makes one party’s contractual performance worthless to the other party. This clause is similar to the force majeure clause in another way. Simple economic hardship such as an increase in labor or product costs is not enough to necessitate this clause.
Final Thoughts
The COVID-19 pandemic has brought significant economic hardship to almost every business in the United States. , it is extremely important to understand the basics of force majeure clauses, impossible or impractical provisions, and frustration of purpose. This applies if you are planning on removing yourself from a contract or fear that a company you work with is looking to break the contract. There are general guidelines for each of these provisions. A company successfully invoking any of these clauses depends entirely on state laws and language located in the contract. Antonoplos & Associates can help your business find out if a force majeure clauses, impossible or impractical provisions, or frustration of purpose is the right step to take when looking to get out of a contract.
For more information regarding Force Majeure or other business issues, contact Antonoplos & Associates at 202-803-5676. You can also directly schedule a consultation with one of our attorneys.