by Scott M. Lewis and Hunter W. Benson
The economic lockdown created by the COVID-19 pandemic has had a drastic impact on all businesses, including their ability to maintain operations and perform commercial contract obligations. As states begin to slowly re-open the economy, it will be important that businesses of all kinds adjust to the current climate created by COVID-19, as well as take both legal and practical steps to prepare for a possible second or third wave of cases and any further interruptions to business that could come with it.
This Legal Update provides an overview of force majeure and other potential defenses to contractual non-performance related to COVID-19, and of practical issues for businesses to consider in evaluating, making, and responding to these defenses. Please note that the availability of these defenses is very fact-specific and dependent on the terms of the contract at issue, the cause of the non-performance, and applicable law (which varies from state to state).
Force Majeure Clauses:
A force majeure clause in a contract can potentially protect a non-performing party under that contract by suspending or excusing performance based on a sudden and unpredictable event that makes performing that party’s obligations under the contract impossible or extremely burdensome to meet. The specifics of a force majeure clause will vary with each contract and factual circumstances, and those specifics will determine whether the non-performance constitutes a breach of contract or is excused by the event or circumstances.
The following are a few examples of common force majeure events that may excuse performance under an existing contract:
• Natural disasters (for example, floods, wildfires, earthquakes, tornadoes and similar “Acts of God”)
• Riots, wars, or insurrections
• Labor strikes
• Epidemics or pandemics
• Governmental closures/civil or national emergencies
For a force majeure event to excuse performance under a contract it needs to (i) be included as a qualifying event in the contract, (ii) be an external event that no party could reasonably anticipate or successfully mitigate, and (iii) make performance under the contract legally or physically impossible or extremely burdensome.
Depending on the particular contract, industry, factual circumstances, and force majeure definition, a party’s non-performance because of the COVID-19 pandemic and related government shutdowns of certain businesses could qualify as a force majeure event. Relatively few force majeure clauses specifically mention pandemics. For force majeure clauses that mention “civil or governmental emergencies” or “rationing” (each of which appears more frequently than “pandemics”), a lockdown order of the type adopted by Ohio and other states at the outset of the COVID-19 crisis may be viewed as a qualifying event excusing a party’s performance. On the other hand, governmental “guidance” or “best industry practices” or partial shut-down orders that allow a business to operate in a different manner or at reduced capacity may not be viewed by a court as a defense to non-performance even though performance may be more costly or uneconomical.
Catch-all language such as “Act of God” and “outside the party’s control” may be construed narrowly (in other words, only the specific events mentioned in the provision will excuse performance) or more broadly (performance is excused if the event was not reasonably foreseeable). Ohio courts historically have applied a more narrow construction to these contractual terms.
Difficult market conditions or financial inability to perform generally will not excuse performance or qualify as unforeseeable events, even if the events that caused the financial distress were unforeseeable. Whether a court would consider the COVID-19 pandemic an ‘Act of God’ is uncertain, since settled case law in most jurisdictions, including Ohio, interprets ‘Act of God’ to mean events like flash floods, earthquakes, tornadoes and other natural disasters.
Related Potential Contractual Defenses:
Even in the absence of a force majeure clause, there are other common law defenses that can be used to excuse or suspend performance, such as the doctrines of impossibility, commercial impracticability or frustration of purpose.
Impossibility may apply when performance of a party’s obligations becomes objectively impossible. This includes the doctrine of “legal impossibility,” where performance becomes illegal, as well as more customary “Act of God” events (natural disasters) such as, for example, a Category F-5 tornado destroying a manufacturing facility.
Commercial Impracticability is similar to force majeure and excuses a party’s performance under a contract when performance is made impracticable – think “extremely burdensome or expensive” – by an event wholly without fault of the party seeking relief and where the contract itself assumes and was predicated on the non-occurrence of the event. Mere financial impracticability or inconvenience will not, by itself, support the use of this defense.
Frustration of Purpose may be available where the essential purpose of the contract no longer can be achieved. The frustrated purpose must be near total and so extreme and evident that without such purpose, the parties would never have entered into the transaction. The burden of proving frustration of purpose is very high, as are impossibility and commercial impracticability.
How to Better Prepare Your Business:
As the economy begins to re-open, businesses need to keep in mind the lessons learned from the initial wave of COVID-19 closures. Now is the time to prepare for a second wave of COVID-19 cases by revisiting current contracts, including “standard” purchase order and sales order terms and conditions, to add force majeure clauses specifically addressing COVID-19 where appropriate, and reviewing new and existing contracts with customers and suppliers to ensure your business is not on the losing side of a force majeure clause.
Now is the time to consider if a force majeure clause in your commercial agreements would help mitigate the effects of a potential second wave of closures. In addition, when entering into new contracts in these uncertain times, you should consider the effect of a supplier or vendor using a force majeure clause against you in the event of a second wave of COVID-19 shutdowns. By thinking of these issues in advance of any additional closures, you and your customers and suppliers can address future COVID-19 closures in a fair manner that accounts for the effects of such closures on all parties. And instead of digging in your heels and tying up human and financial resources for a costly and possibly unnecessary legal battle with an uncertain outcome, you may be far better off seeking a commercially sensible middle ground in order to preserve a valuable relationship with a key vendor or customer.
The legal authority concerning the defenses described in this Legal Update, in particular their application to COVID-19 cases, is unsettled and largely untested, and providing or responding to a party seeking to invoke a force majeure clause to excuse or delay performance requires careful consideration of a number of issues. The attorneys at Meyers Roman are available to provide you with guidance regarding force majeure clauses and related legal defenses in your agreements and how to best protect your business from additional COVID-19 closures should they arise.
If you would like to discuss, please contact your Meyers Roman attorney or firstname.lastname@example.org, or phone (216) 831-0042.
This Legal Update is a summary only, prepared for general informational purposes, and is not an exhaustive description of the aforementioned matters or issues. Nothing in this Update is intended or is to constitute a legal opinion or legal advice by the authors or Meyers, Roman, Friedberg & Lewis.