Until recently, you probably never paid much attention to the phrase “force majeure.” No, it’s not a spell from a Harry Potter magic book. You know, it’s that miscellaneous provision that sometimes, but not always, appeared at the end of a contract. After all, it was boiler plate legalese and not the sort of thing with which business owners and professionals might think to preoccupy themselves. Then COVID-19 hit and drastically changed the world as we know it. In addition to struggling to find toilet paper and paper towels, people are now scrambling to finally understand what in the world “force majeure” actually means.
Traditionally speaking, force majeure means “superior force.” It is the occurrence of some unforeseeable event that hinders, prevents, delays or significantly impacts the ability of a party to fulfill its contractual obligations. In such instances, the performance of a contract might be suspended during the period of time in which the force majeure event lasts. Classic examples of force majeure triggering events involve “acts of God” (e.g., floods, fires, hurricanes and earthquakes) or other events outside the control of the parties to an agreement (e.g. governmental orders, embargoes, wars, riots and labor disputes). Sometimes, force majeure clauses might even include reference to an “outbreak” being a covered event.
For illustrative purposes only, let us assume a hotel is contracted to host a business conference. However, several weeks prior to that conference, there is an outbreak of an extremely contagious disease (not unlike COVID-19) and this causes a pandemic to be declared. As a result, various governmental orders are issued restricting the gathering of large crowds until such pandemic is declared to be over. Aside from the terrible societal and humanitarian impacts caused by such a pandemic, there are serious business and economic consequences as well. A microcosm of this could include the hotel’s inability to hold the conference.
Here, the hotel might argue that force majeure applies (assuming a force majeure clause is contained in its underlying contract) because the hotel cannot host a large group of people without violating the applicable governmental orders. Further, the hotel could be considered negligent, if not grossly so, if it were to follow through with allowing a gathering of people on its premises at a time when an easily transmittable pathogen is rapidly spreading. In relying on force majeure, the hotel could claim that it is excused from hosting the conference for a reasonable amount of time (i.e., until after the force majeure event is over and the hotel can once again safely host the conference).
Alternatively, if a force majeure clause is not in its contract, the hotel may try to rely on the doctrine of “impracticability.” This common law principle, which is similar to force majeure, may arise when it would be unreasonably difficult and/or expensive for a party to perform under an agreement due to unforeseen events outside the control of that party. In some instances, the performance might be so difficult that it could be considered impossible to complete. These events may frustrate the original intent of the parties to an agreement and require them to consider some extension of time, if feasible, before contractual performance is required to be completed. Here, the hotel would want to argue that it is impracticable to host the business conference for several reasons, including those noted above.
You might be asking how force majeure and impracticability apply in other circumstances given the current context of COVID-19. Similar to the above hypothetical concerning the hotel and the pandemic, there are many different scenarios currently playing out in which the parties to a contract are finding it exceedingly difficult, if not impossible, to fulfill their agreed-upon obligations due to the threat of (and limitations imposed by) COVID-19. Each scenario entails a different set of facts and arguments. There may be situations in which the facts do not align so clearly in favor of one party trying to assert force majeure. Often, the parties find themselves in a “grey area” of sorts in which one party has its reasonable arguments in favor of force majeure whereas another party has strong counterarguments against it. This then becomes a scenario ripe for dispute (and potentially litigation).
As a world, we are currently faced with an unprecedented (at least in our lifetimes) global dilemma with far-reaching effects. Not only must we make personal sacrifices, we must also endure troubling times in our professional relationships. However, this does not necessarily mean that business agreements need to be torn up and parties must rush to litigate with one another. Rather, there are lessons to be learned under these circumstances. We must slow down for a moment, breathe, assess the situation and respond accordingly. In doing so, business owners and other individuals might consider some helpful tips when it comes to COVID-19 and how it might affect their underlying contractual relationships.
Review the contract. Certainly, you should review your underlying contracts to determine if COVID-19 excuses the performance of the parties’ respective obligations under that agreement. Do these contracts have force majeure clauses? If so, what do they say? Do such force majeure clauses cover events like “outbreaks,” “pandemics,” “governmental orders” or other similar scenarios? If not, is there a reasonable and supportable argument to be made that COVID-19 makes it impracticable for the parties to perform under their agreement and that such performance must be delayed? What are the available counterarguments? If the parties are forced to litigate this issue, does the underlying contract state that the “prevailing party” in such litigation would be entitled to recovery of their attorney fees and expenses; meaning the “losing party” would have to pay for such costs? What does the contract say as far as governing law and the venue for resolving disputes? Is it even feasible to attempt litigation at a time when a pandemic is unfolding and court access might be limited? In such instances, it may be best to have an attorney review such agreements to assess available options and potential ramifications.
Look at applicable law and governmental orders. Here, you should understand what sort of statutes, orders, moratoriums and other governmental actions might apply to your particular situation. You should also consider how such applicable law and/or governmental actions govern, affect or potentially even override the contents of your underlying contract. Again, it may be best to consult with an attorney in order to determine the applicability, scope and available exceptions (if any) concerning such applicable law and governmental orders. While performing your due diligence, you might also consider visiting our COVID-19 Resource Center for updates and information on the current pandemic.
Communication is key (i.e., try to negotiate). In troubling times, emotions can run on high and the parties to an agreement might forget to communicate with each other. Once communication breaks down, a once “sweet” deal can turn sour very quickly. Rather, the parties to an agreement might consider switching their way of thinking from “going to battle” to instead considering what is a fair compromise and how can we negotiate to still get what we want; especially when considering the current change in events. Sometimes, deals can be salvaged even when the surrounding circumstances are dire. Again, it would be prudent to consider having an attorney advise and assist with such negotiations.
Consider dispute resolution processes. There may be occasions in which the above steps cannot lead to a fruitful resolution between the parties. When this happens, one should consider how strong their case is for asserting force majeure, how strong the other party’s case is against it, and the cost-benefits of going into a formal legal dispute rather than trying to negotiate a compromise. There may be opportunities for the parties to iron out their issues in a private venue such as mediation. This might even be accomplished through proper social distancing via remote communication technologies, such as videoconferencing. If all else fails, litigation or arbitration may eventually become necessary. Again, best practices would include working with legal counsel to consider these options.
In addition to the foregoing, you might consider reading the other article featured in this month’s Sidebar written by David S. Poole, partner at Poole Shaffery & Koegle, LLP. Mr. Poole’s article addresses various actions that businesses should consider taking when preparing for disputes that may arise in the wake of a pandemic.
During “normal” times, the above hypothetical concerning the hotel and the pandemic might be something you would see as a made-up fact pattern in a law school exam. Yet we are currently living in the “new normal,” as many are now calling it, and hypothetical scenarios are quickly turning into reality. We already have plenty to worry about in terms of how we respond to this pandemic on a personal (and interpersonal) level. However, we must also consider how we handle ourselves in the professional arena when it comes to COVID-19. The above recommendations may prove useful in doing so. Just remember to try to relax and take a nice, calming exhale (and please do so at a distance of no less than six feet).DISCLAIMER: Legal advice is the application of law to an individual’s specific circumstances. This article was prepared for general information purposes only. This article is not legal advice and is not to be acted on as such. Poole Shaffery & Koegle, LLP disclaims any intent to provide legal advice to, or to form an attorney-client relationship with, any person using this article. Please consult a lawyer for information and advice that is particular to your situation