Excused from Performing Under a Contract – The Force Majeure Clause
If small business owners ever worry about contractual performance – whether by them or a counter party – now is the time more than ever. When the world shuts down due to a global pandemic, a small business owner’s world may literally be falling apart. Small businesses may have passed from one generation to the next, or may have been built over a lifetime of grit, sweat and tears. Now, everything about the small business is at stake. Layered on top of concerns over employee and personal safety, drop in revenue, rent, and other operating costs are the small business’ contractual obligations, and what happens if a small business defaults.
A doctrine called force majeure may be the solution – not as a way to terminate the agreement, but as a way to allow a party to be excused from performance for a certain period of time (and usually without penalty or being in default). Black’s Law Dictionary defines a force majeure as “[a]n event or effect that can be neither anticipated nor controlled”, and usually involves natural disasters or acts of God, like storms, earthquakes, tsunamis, etc. Or events or circumstances can be man-made events, like riots, wars, terrorist attacks, governmental orders, strikes, etc.
Even though this doctrine exists, its specific application to a small business depends on the wording in the contract and the state and/or federal law that applies to the contract. If a force majeure clause exists in the contract, then make sure to review it carefully and comply with it strictly. It is best to review the entire contract, and not just the force majeure clause itself, because many times, other contractual provisions modify or elaborate on the the force majeure clause. If a force majeure clause is not specifically identified in the contract, then the concept may still be included in other parts of the contract; and look to the contract’s applicable law to decide whether impossibility or impracticability can be the basis to excuse performance of a contract.
- Does the force majeure clause cover the event? Some force majeure clauses specifically reference pandemics, epidemics, and governmental orders as specific events that qualify as force majeure events, thereby allowing a party to invoke the force majeure clause to excuse its performance under the contract; and others have catch-all language like “other acts of God” or “events beyond the reasonable control of a party”. If the clause specifically identifies pandemic, epidemic or governmental orders, then the argument is fairly straight forward (as it relates to COVID-19) to allow the affected party to be excused from performance. If the clause does not list these specific events, then
look to the contract’s governing law (which is usually a separate clause that identifies which state’s or federal law applies) for the interpretation and enforcement of the contract. Cases, statutes or regulation in that jurisdiction may be helpful in determining whether COVID-19 (or any other event really) has been determined to qualify as a force majeure event.
- Is there a notice requirement to invoke the force majeure clause? As stated above, strict compliance with the force majeure clause is important. Many force majeure clauses have a notice requirement, and the party invoking force majeure must comply with it in order for the clause to be invoked. There is usually a time component in the notice. For example, the clause may require prompt written notice by the invoking party or notice within a certain number of days of having knowledge of the force majeure event. Failure to meet the timing component can prevent a party from invoking the force majeure clause, so small businesses should be proactive and review its contracts to understand these requirements.
- Is there a time limit on how long a party can be excused from performance? Many force majeure clauses contain a time limit on how long a party’s performance may be excused. For example, a party is excused from performance for only a certain number of days. If there is such a time limit, then the invoking party will have to figure out what happens when the time period expires? Can it get an extension?
- Is the obligation to make payments under the contract expressly excluded as an excuse even if there is a force majeure event? Some contracts contain a statement that the obligation to pay is not excused due to a force majeure event. Thus, even if there is a force majeure event, a party cannot rely on it to avoid making payments under the contract.
- Even if force majeure applies, is the invoking party required to comply with other obligations? If force majeure applies, is the invoking party required to mitigate the impact of the force majeure event on its ability to perform? If so, then to take advantage of continued excuse from performance or to avoid default liability, the invoking party must comply with this requirement.
- Can the parties negotiate and agree to a course of action regardless of what the contract states? Regardless of what the contract states, the parties can always mutually agree on a course of action. After a good understanding of its rights and obligations under the contract, a small business can always negotiate with the counter party on a course of action that best suits them.
Small businesses need to be proactive, understand its contracts, and plan accordingly to navigate these uncertain times. The discussion above is intended to help analyze a small business’ options, but other actions and considerations may still be needed. Seek good advice, as other issues include what sort of remedies a counter party has under the contract, what happens if a lawsuit is filed, etc., to help plan accordingly.
About the Author:
Tri Nguyen has served as general counsel and company lawyer to businesses, executives, startups and entrepreneurs for over 18 years. He particularly enjoys helping companies grow and achieve their strategic plan, and believes that every business needs a Chief Legal Advisor. He can be reached at www.trilawoffice.com.