Do Your Business Contracts Excuse Your Performance in Times of National Emergencies?
The fallout from the global COVID-19 pandemic has disrupted everyone’s life and upended nearly all channels of commerce. State and local governments are allowing only essential businesses to stay open and banning large public gatherings, resulting in travel, hotel and conference cancellations. These difficult but necessary measures take their toll on every segment of the economy and have led many businesses either to adapt to full-time telework or shutter their doors.
These changes make it nearly impossible for businesses to maintain manufacturing and distribution operations, and performance of contractual obligations is severely hampered, if not altogether hindered. The importance of contract language is ever apparent in this climate, and particularly provisions that excuse or delay obligations to perform when events beyond a party’s control or unforeseen events arise.
The legal name for such a provision is force majeure, and it appears in most contracts but is rarely invoked. That is because it arises only if unforeseen circumstances beyond either party’s control, like war, natural disaster, and possibly even a pandemic, influenza or disease, depending on the specificity of the wording of this provision.
Most contracts contain specific lists of qualifying force majeure events. Typical force majeure clauses include reference to things like acts of God, terrorism, and labor strikes. Force majeure provisions that include specific reference to a pandemic, influenza or disease put companies in the best position to excuse performance during this current pandemic. Wording like “national emergency” or “governmental actions” are eligible force majeure events and might excuse performance in this pandemic, especially given the many government-mandated business closures in place.
While it is ideal to include specific and broad force majeure language in your contracts, state law might provide relief if you overlooked this term in prior contract negotiations. Under state law, performance might be excused on common law principles of “impossibility” or “frustration of purpose.” However, the event must have been unexpected and the party asserting the defense must not have assumed the risk that the unexpected event would occur.
Now is the perfect time to review the terms of your contracts for force majeure language, and if your contracts contain such language, identify:
- what events qualify as force majeure,
- whether entire performance can be excused or just certain obligations,
- whether excused performance also includes the right to terminate the contract,
- whether any financial liability will be imposed if force majeure is asserted,
- what notice obligations, if any, exist to trigger a force majeure defense, and
- whether the party asserting the defense needs to mitigate the harm to the other party.
There is nothing like a crisis to teach us better business dealings, so there is no time like the present to limit your liability.