COVID-19 – Force Majeure & Frustration of Contract
By: Jennifer D. Scott & Jillian C.S. Blanchard
Force majeure contract provisions refer to events outside of the control of a party that prevents a party from performing its contractual obligations as originally contemplated under the contract. Generally, force majeure provisions typically provide the party whose performance is affected by a force majeure event with relief from its contractual obligations for the duration and to the extent such contractual obligations are affected by such an event. Once the party’s performance is no longer affected by the force majeure event, the parties continue to perform their obligations under the contract as originally contemplated.
The availability and extent of relief provided to a party under a force majeure provision will be contract-specific. Not all contracts include force majeure provisions and those that do will differ from contract to contract. These provisions define the specific events the parties agree will constitute a force majeure event, as well as the relief the parties agree to provide each other in the event of a force majeure event. While these provisions are majorly contract-specific, there are general terms that are common to most.
In order to invoke a force majeure provision, a party to a contract must be able to show the following:
(1) the event is beyond the reasonable control of the party whose performance is affected;
(2) the event did in fact prevent or hinder the party’s ability to perform its contractual obligations; and
(3) the party whose performance is affected has exhausted all reasonable measures to avoid or mitigate the event or its repercussions.
Force majeure events typically include “Acts of God”—such as hurricanes, forest fires, other natural disasters and physical risks that could impact a business or project. Political force majeure events are also often included and address changes in the political or legal environment that could impact a business or project and include actions taken by the government that affect the business or project. Many contracts will also address situations like diseases and pandemics that are largely outside of the control of the parties.
If your contract includes a force majeure provision that specifically addresses health-related emergencies with widespread impact like COVID-19, it will be easier to assert a force majeure claim related to any frustration of contract experienced as a result—so long as COVID-19 did in fact prevent or hinder your ability to perform your contractual obligations, and you exhausted all reasonable measures to avoid or mitigate the consequences. However, if your contract’s force majeure provision does not explicitly address situations like a pandemic, it is likely that such a widespread health emergency will still qualify as an Act of God of action by the government force majeure event.
Amidst the COVID-19 pandemic, it is also important to keep in mind that unless your contract explicitly provides relief for a force majeure event that solely affects the profitability of a business or project, it is possible that general financial detriments or economic events arising from COVID-19 and affecting profitability will not constitute a legitimate force majeure event. Additionally, COVID-19 will likely bring unique discussions pertaining to a party’s duty to mitigate under force majeure provisions. With COVID-19’s international affects, we will likely see less alternatives available to individuals seeking to continue performance under a contract. However, what an individual does to mitigate the spread of COVID-19 in its workplace will also be considered. If you have not put protocols in place to mitigate the potential spread of COVID-19 and cases of COVID-19 in your workplace prevent or impair the ability to perform contractual obligations, you may be deemed to have failed to reasonably mitigate the event or consequences of the force majeure event.
If you intend to invoke your rights under a force majeure provision, you will need to refer to your contract to determine the notice requirements for seeking relief on account of a force majeure event. If you are entitled to relief, the typical remedy will include an extension of time to perform the contractual obligations that are affected by the force majeure event, and some contracts provide parties with the right to terminate the contract if the force majeure event continues for an extended period of time.
What if your contract does not include an explicit force majeure provision?
First, check to see if your contract includes a “change of law” provision that provides relief in the event that a change of law affects a party’s ability to perform its obligations under a contract. These provisions will likely provide relief in the event performance of contractual obligations are affected by travel restrictions, “stay at home” orders and quarantine mandates ordered by either local, state and national government. Similar to force majeure provisions, the relief provided under a change of law provision will be contract-specific and depend upon the specific remedies contemplated in the provision by the parties.
While it is preferable to have provisions in your contract that explicitly lay out all potential events the parties agree will necessarily affect the performance of contractual obligations and the relief the parties will provide each other in the event of such complicating circumstances, the doctrine of frustration is an alternative remedy that is implied in all contracts that do not include an express force majeure provision.
In order to seek relief under the doctrine of frustration, the following factors must be met:
(1) the event must not be caused by any party to the contract;
(2) the event must be unforeseen at the time of contract and occur AFTER the formation of the contract; and
(3) the event must result in the physical or commercial impossibility to fulfill contractual obligations, or transform such contractual obligations to the point that they are majorly different than the obligations originally contemplated and agreed upon by the parties at the time of contract.
While the availability of the doctrine of frustration may be a necessary safeguard that a party must rely upon in extreme circumstances, the relief provided is different and affects the subsequent performance of obligations under the contract differently. Unlike force majeure provisions that typically extend the timeframe for performance under the contract, in the alternative, invoking the doctrine of frustration immediately terminates the contract and the parties are no longer bound to perform the contractual obligations originally contemplated by the parties to the contract. Additionally, due to severe repercussions of the doctrine of frustration, the standards for proving frustration as much higher than those for force majeure. For the doctrine of frustration to apply, the obligations affected by the event must be fundamental and material to the contract itself.
With the many uncertainties surrounding COVID-19, its duration and consequences on individuals and businesses, it is important to review your current contracts to determine what relief is provided to you under force majeure and change of law provisions. When doing so, ask yourself the following questions:
(1) Does the language of such provisions expressly contemplate complications arising from a health-related emergency like COVID-19?
(2) If not, does the general language allow the inclusion of an event like COVID-19 under any catch-all provisions?
(3) What obligations is COVID-19 prohibiting you from performing? Can you specifically attribute these complications of your performance of such obligations to COVID-19?
(4) What steps have you taken to mitigate the potential complications that COVID-19 may pose on your performance of contractual obligations?
(5) Importantly, have you taken reasonable steps to mitigate the spread of COVID-19 in your workplace?
(6) What notice is required under your contract?
(7) What options do you have to mitigate the financial repercussions the event may have on your business or project—business interruption insurance…force majeure insurance?
What If you intend to make a force majeure claim or receive a force majeure claim from another party to a contract?
It is important to review the scope and extent of available remedies under the provisions specific to your contract. As we continue to learn more about the duration and extent of contractual complications arising from COVID-19, we are continuing to determine the best way to work through contractual issues arising from the consequences of the pandemic, as well as government action taken in efforts to mitigate the spread of the virus.
If you have questions about invoking or responding to a force majeure, change of law or doctrine of frustration claim, it is recommended that you consult legal counsel to determine your rights under the contract, as well as what options the parties have to continue under the contract and/or terminate the contract.
In these uncertain times, the lawyers at Shipman & Wright are prepared to address your questions and concerns related to COVID-19 consequences on your business and projects, and assist you in navigating your contractual rights.