Force Majeure Clauses and COVID-19 Business Interruptions
Besides turning our personal lives upside down, the pandemic is still creating major problems for companies and individuals trying to conduct business while honoring all their contractual obligations. When difficult questions arise, a proactive review of all force majeure clauses and plain contract language can guide all attempts to perform or at least mitigate damages.
As most business managers know, a force majeure clause is designed to either limit or remove liability for performing tasks under a contract when unexpected “Acts of God” or other unavoidable catastrophes make performance either impractical or impossible. Since COVID-19 government lockdowns and other restrictions have caused disruptions in many business transactions, careful analysis of all underlying factors is crucial to resolving conflicts.
Here are some useful reminders to help businesses either interpret any force majeure clauses present in their contracts -- or decide how to proceed under basic common law principles.
What type of language is usually contained in a force majeure clause?
Although such language can vary greatly, it basically states that if any major, unforeseeable, and unavoidable events occur that cause one or both parties to be unable to perform under the terms of the contract, no further obligations exist. Common events referenced in these types of clauses include natural disasters (like hurricanes or tornadoes), terrorist attacks and major labor strikes. Once at least one party invokes a governing contract’s force majeure clause tied to a current COVID-19 dispute, the parties must then try to agree on whether all the underlying facts support excusing all further obligations to perform or mitigate damages. If the parties cannot agree, they must then resolve their differences through arbitration, mediation, or the Texas court system. Although claims are often made in these types of situations that the contractual terms are too ambiguous, that’s usually not enough to prevent a resolution.
How should the parties respond to non-performance if there is no force majeure clause?
Assuming there is no other contractual language present that might excuse non-performance, the breaching party can assert all available common law defenses to non-performance under a contract. These defenses include commercial impracticability (frustration of purpose) and the doctrine of impossibility of performance.
When arguing that performance has become impossible (or impracticable), the non-performing party must state:
That a specific event (like COVID-19) occurred that the parties had assumed would not take place -- thereby disrupting events;
It would not be commercially practicable to start or continue performance, and
The party that has not met all of its contractual obligations never agreed (in any express or implied manner) to fulfill its obligations under the type of circumstances that have now unexpectedly unfolded.
An argument based on the doctrine of “frustration of purpose” might be best understood if explained with a hypothetical. Assume that a cleaning service company formed a contract with a restaurant owner just prior to the start of the COVID-19 lockdown. If both businesses were soon deemed legally non-essential and all workers furloughed, the parties could consider their future contractual duties to be fully discharged – or at least for the length of the lockdown period.
Under this type of hypothetical, neither party could have foreseen the furloughing of their workers prior to the pandemic lockdown orders. Of course, if the parties’ contract contained some type of general force majeure clause, they might then move forward with formal litigation, arbitration, or mediation to determine any or all remaining rights or obligations.
Ongoing, friendly negotiations with all contractual parties remain crucial
Throughout the remainder of the pandemic, all businesses should seriously consider consulting with their Houston business law attorneys to determine how they must proceed to fully protect all their current contractual interests, without relinquishing any legal rights. It may also be wise to negotiate new contracts that provides far greater flexibility -- and expressly release all parties from all remaining requirements set forth in their pre-COVID-19 contracts.
It might also prove useful to add new “notice” provisions in business contracts that require the parties to immediately contact one another when new government COVID-19 regulations or edicts are announced. Such new provisions could help prevent future misunderstandings that could lead to costly future lawsuits.
Finally, all small and large businesses and corporations should also consider asking their Houston business law attorneys to carefully review all their current business insurance contracts to see if they need to be renegotiated based on new COVID-19 realities. No company wants to keep paying premiums on any policy that may not be fully honored in the future due to all the unpredictable and challenging events still occurring due to the pandemic.
Please feel free to contact any of our Murray Lobb attorneys with your current COVID-19 or other business law questions so we can help you better protect all your commercial and contractual rights. We also remain available to draft any new contracts or others documents that you may currently require.