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The Impact of COVID-19 on Performance Contracts

Mar 24, 2020 - Breach of Contract by

The Force Majeure Clause: How the Coronavirus Impacts Performance Contracts

The 2020 Coronavirus (COVID-19) pandemic is causing disruption to business operations as expansive, if not more expansive, than the 9/11 terrorist attacks. As these disruptions continue, parties should review their contractual obligations, rights, and remedies to assess available recourse or consequence in the event of performance delays. A careful analysis of “force majeure” clauses is important to understand in these uncertain times.

When it is impossible for a party to perform its obligations under a contract because of an “act of God” or other unforeseen circumstance, the “act of God does not release the parties of their obligations unless the agreement specifically states such. However, where the contract includes a force majeure clause “acts of God” or other circumstance beyond the control of the parties may excuse performance.

“Act of God” clauses or “Force Majeure” clauses are contract provisions that relieve a party’s nonperformance when “acts of God” or other extraordinary events prevent a party from performing its contractual obligations. Lately, these clauses are receiving a great deal of attention due to the COVID-19 outbreak.

Elements of Force Majeure Clauses

Courts look to several elements when considering the applicability of a force majeure clause:

  1. whether the event qualifies as force majeure under the contract;
  2. whether the risk of nonperformance was foreseeable and able to be mitigated; and
  3. whether performance is truly impossible.

Effect of COVID-19 on Force Majeure Clauses

The party seeking to assert the force majeure clause usually is required to prove it applies, specifically establishing that the event causing the inability to perform was beyond its control and without its fault or negligence. In the event that the parties’ force majeure clause lists specific viruses, epidemics or pandemics, this challenge will be easily met.  But, if the clause does not contain similar description, the analysis becomes more complicated.  Simply using the phrase “act of God” does not necessarily guaranty desired relief.  Whether courts ultimately determine that COVID-19 is an “act of God” remains to be determined.

In the absence of a force majeure provision, or as an alternative, parties could be excused from performance by claiming impossibility or impracticability.

The doctrine of impossibility of performance applies when uncontrollable circumstances have made the contract impossible or impracticable to carry out. Impossibility of performance is usually raised when a party is unable to perform under a contract due to issues beyond his or her control.  The application of the impossibility to perform doctrine based on the COVID-19 outbreak will depend upon the facts and circumstances of the contractual relationship. Parties typically cannot rely upon an impossibility defense where an inability to perform is due to subjective impossibility or inconvenience.

Unlike force majeure clauses, a party seeking to rely upon an impossibility defense must show that it made reasonable efforts to overcome the obstacle to performance.  Specifically, a government regulation does not necessarily excuse performance if a party does not exhaust all reasonable resources to overcome the government action. Therefore, parties seeking to use an impossibility defense should take steps to ensure that all reasonable options for performance are exhausted before asserting that performance is impossible under a contract.

The foreseeable future will bring many claims of force majeure and/or impossibility of performance in response to business closures. Whether these claims will be effective will depend on the facts relevant to the particular contract and business at issue.  As such, all parties should evaluate how the COVID-19 outbreak impacts their ability and their counterparty’s ability to perform their contractual obligations.

Companies affected by COVID-19 should take the following steps:

  • Review the force majeure clauses in their contracts to identify what rights and remedies are applicable and available and to identify notice requirements (if any exist).
  • Assess and document alternative means of performance, if available, to reduce disruption to operations.
  • Assess the consequences of a breach.
  • Review applicable insurance policies, including Business Interruption Coverage.
  • Assemble and retain all supporting documentation.

As the coronavirus situation continues to evolve, Olive Judd, P.A. will provide additional guidance for its clients.

About the Author: 

Kristy E. Armada is a business litigation attorney at the Florida law firm of Olive Judd, P.A. Ms. Armada helps businesses identify and address the legal issues that are involved in the decisions that they make every day. Most of Kristy’s clients treat her as a trusted member of their management team and seek her advice on the broad range of matters that arise on a regular basis, such as those concerning partnerships and shareholders, licensing, contracts, employment, construction or real estate.  Please contact Kristy at (954)334-2253 with any questions.