By AHC Attorney Merry B. Luong
The Coronavirus (COVID-19) pandemic has caused a global disruption to businesses, causing many to temporarily close and lay off employees. As businesses assess the short– and long–term economic impact of COVID-19, they should also evaluate what contractual obligations and remedies are available under various agreements (e.g., leases, vendor agreements, and supply agreements). When performance may be delayed or may not occur altogether, businesses should consider their force majeure clauses, if any, and the doctrines of impossibility, impracticability, and frustration of purpose.
Force Majeure
Generally, unless a contract provides that performance will be suspended or relieved when certain events occur (e.g., “acts of God,” government regulation, acts of war or terror, strikes), each party is obligated to perform. However, when there is an express force majeure provision, certain events or acts may excuse non-performance or delayed performance. But depending on the jurisdiction, courts may construe force majeure provisions narrowly and excuse performance only for those events expressly listed in the clause. Nonetheless, if the force majeure provision includes pandemic, epidemic, quarantine, government act, disease, or similar terms, then the COVID-19 pandemic may excuse performance or allow delayed performance.
When there is a catch-all or broad force majeure clause, whether performance is excused requires a more complex analysis of the facts. Most courts will not excuse performance under a broad force majeure provision when the event was foreseeable at the inception of the agreement.
Alternatives to Force Majeure
If there is no force majeure clause in the agreement, performance or delayed performance may be excused under the doctrines of impossibility, impracticability, or frustration of purpose. Parties should keep in mind, though, that these doctrines require a high bar for relief in many jurisdictions. Generally, it is not enough that performance is merely inconvenient or unprofitable. Some courts require that the circumstances preventing performance be unforeseeable and beyond the affected party’s control.