26 Mar Covid-19 and Breach of Contract a/k/a Force Majeure to the Rescue!

Posted at 22:53h in Contracts & Drafting, General by Glenn M. Rumbell

The Covid-19 pandemic and government mandated shutdowns are slowing down and even putting many businesses, perhaps yours included, on hold. At the same time, there are employees, rent and suppliers to be paid, and customer commitments to be met. A sudden decline in revenue combined with inflexible contractual obligations can be a toxic combination.

If the Covid-19 pandemic and/or government restrictions are making it difficult for you to meet your obligations to your customers, or if you are concerned your suppliers and contractors may fail to meet their obligations to you, now is the time to review the finer details of your contractual arrangements. When you do, one clause that will be crucial to understand is the force majeure clause. The clause that is inserted into agreements for times like these.

‘Force majeure’ which essentially means “superior force” or “chance occurrence, unavoidable accident” is the name lawyers give to a clause that grants a temporary reprieve, and/or exit from a contract when a party cannot meet its obligations due to events that are beyond its control. Force majeure clauses can differ quite dramatically ranging from short summary type provisions that are open to interpretation to lengthy scripts that clearly define the events that are covered and how the clause may be relied upon.

Not all force majeure clauses will cover a business interruption caused by the Covid-19 pandemic. But if the clause in your agreement does and you are unable to meet your contractual obligations, the force majeure clause may save you from breach and liability for damages. On the other hand, if it is a supplier that cannot meet its obligations to you, you need to understand the implications of the clause and whether it will permit a delay that will ripple through your service/supply chain to your customers.

While the provisions of any specific force majeure clause may differ, a typical clause has the following elements:

  • It identifies the events (such as an act of God, or national emergency) that constitute a force majeure
  • It specifies whether the force majeure must prevent or just hinder the ability to perform the agreement
  • It establishes whether the party experiencing the force majeure must attempt to mitigate its impact on the other party
  • It sets out the process by which the party experiencing the force majeure must declare its existence to the other party
  • It temporarily excuses the party experiencing the force majeure from performing its obligations under the agreement thereby avoiding an event of default
  • It establishes a deadline by which the party experiencing the force majeure must once again commence performing its obligations under the agreement – failing which, either or both parties may terminate the agreement

The concept of force majeure exists only in contract and is not part of common (judge made) law. If an agreement does not contain a force majeure clause and there is no other available suspension or termination right to rely upon, the party experiencing the event will generally be required to perform the agreement and be responsible for damages to the non-breaching party for a failure to do so. I say ‘generally’ because there are a few common law defenses that may be available including “Impossibility” where performance of the contract is made impossible by the event, or less likely (with respect to Covid-19) “Frustration” where the underlying foundation of the agreement is changed by the event. The standards for both defenses are quite high, and they should not be considered equal in substance to a good force majeure clause. In the case of “Impossibility” for example, performance must literally be impossible, not just financially imprudent or difficult to achieve.

If you believe the Covid-19 pandemic will impair your ability to meet your contractual obligations, or if you are concerned that some of your suppliers or contractors may default on their obligations to you, now is the time to have your agreement(s) reviewed and to develop a proactive strategy for dealing with any problems before they become critical.