By Jill Halper
In light of the imminent widespread COVID-19 outbreak across the U.S., parties to contracts, both in business and employment scenarios need to carefully review their existing agreements in order to determine how these recent events might impact their contractual obligations. For example, in the likely scenario that a party to a contract is presently unable to perform under the contract due to having to self-isolate, due to an office, workplace or business closing, due to having the virus or any other related reason, can that party be relieved of their contractual obligations without exposure for breach? The answer is IT DEPENDS.
An Act of God May Void a Contract
Generally, as employment attorneys, we handle the drafting, review and negotiation of contracts for employers and employees as well as for asset purchase, merger, partnership, buy out and other business transactions. While the purpose of a contract is to bind the parties, there are certain instances, where parties are excused from performance because a contract is found to be void and no longer enforceable under law. With a voided contract, the parties are no longer bound by the contractual duties set forth in the agreement. Circumstances that might render a contract void by operation of law include a lack of capacity to perform by one or both of the signors, mistake, breach, signing under duress or coercion, and impossibility of performance. Regarding this last circumstance, an act of God may be interpreted as something that makes the performance of the contract impossible or impractical. In this instance, and absent express language voiding the contract for an act of God or the rule of impossibility, one would attempt to argue that because of unforeseen occurrences which were unavoidable and would result in extreme delay or expense, the contract is void and as such, the promise to perform is discharged.
The Impact of COVID-19 and Act of God Provision in Contracts
It is no doubt already clear to you how all of this fits into the current state of affairs regarding the COVID-19 outbreak. If you are currently a party to a contract and are unable to fulfill your duties under that contract because of these unforeseen events, you might be able to declare the contract void and thus discharge you from your contractual obligations. The first step is to determine whether your contract contains an act of God clause, otherwise known as a force majeure clause. These clauses, often used in insurance contracts in order to remove or limit liability for injury and losses caused by acts of God, also find their way into other important transactional instruments. If your contract does not include an act of God or force majeure clause, generally speaking, one will not be implied. If your contract does contain a force majeure clause, the specific language used will determine the scope and applicability of the clause. The fact that a contract contains a force majeure clause does not automatically mean that you have the right to breach or seek relief as a result of impacts to your business from COVID-19. Because these are unchartered waters, it is highly unlikely that your current contract terms reference this virus as an act of God covered by this clause. Absent such express language, you will need to determine whether an event of force majeure under your contract has occurred. This is a matter of both a strict reading of the contract language and contract interpretation.
An Employment Attorney Can Provide Guidance
With this in mind, it is important that you seek legal advice and examine any contract where you are experiencing challenges in fulfilling your contractual duties or receiving the benefits of the bargain under the contract, because of the COVID-19 situation. In the absence of express language, we will need to analyze and interpret the language in order to counsel you as to your rights and liabilities. It is not as easy as one might think to get out of a contract and avoid a breach as the standard for demonstrating “impossibility of performance” is a hard one to meet. A disruption that merely impacts the profitability of a contract may not be sufficient for a force majeure claim, nor would an economic downturn or other ordinary adverse business conditions likely be sufficient. Therefore, it is always advisable to expressly include (or to intentionally not include) a customized force majeure clause, depending on which side of the agreement you are on. This is something we discuss with our clients when drafting and reviewing agreements or will help our clients negotiate depending on what their objectives are. Needless to say, such language in your agreements could be a much needed life-line for your business or job, especially during the current crisis.
What is a Usual Force Majeure Clause
In examining your agreements for the relevant and controlling language, a contractual term which states only that the “usual force majeure clause” applies or that uses boiler plate language has been held void for uncertainty. A force majeure clause operates as an exclusion clause, excusing a party from performing its contractual obligations. It is therefore subject to the reasonableness test under the Unfair Contract Terms Act 1977 or the fairness and transparency requirements of the Consumer Rights Act 2015. A force majeure clause that is too broadly drafted maybe considered to be unreasonable and declared void, providing no effective protection to a party and leaving them exposed to a claim for damages. What we are now so keenly aware of is that a force majeure clause that references acts of God may encompasses much more than natural disasters and weather events. As such, the language will ideally reference not just acts of God, but also might include particular events such as pandemics, outbreaks and epidemics. One might even want to include trigger events such as quarantines, social distancing mandates, government imposed lockdowns, shutdowns, shortfalls, supply chain obstacles and the like in these clauses These are events that we might not have previously contemplated, but given what we know now, they should be discussed and considered so as to make your force majeure clause as clear and comprehensive as possible. Courts in this Circuit have held that force majeure clauses should be interpreted by reference to the express words used and not by the parties’ general intention. An optimal force majeure clause will typically seek to exclude liability or excuse non-performance in certain circumstances described with a high degree of specificity AND be followed by a catch-all phrase. It might also include language that requires the invoking party to demonstrate that the event could not have been mitigated by preventive action.
Sample Force Majeure Clause
As such, in light of recent events, the below sample language might be contemplated when advising our clients in their current and future contract matters:
“Neither party hereto shall be liable except under the indemnities provided herein and for the payment of monies due hereunder for failure to perform the terms of the Agreement when performance is hindered or prevented by strikes (except contractor induced strikes by contractor’s personnel) or lockout, riot, war (declared or undeclared), act of God, pandemics, epidemics, insurrection, civil disturbances, fire, interference by any Government Authority, including but not limited to government shut downs of business operations, mandated quarantines or curfews, mandated social distancing, or other cause beyond the reasonable control of such party and unable to be reasonably prevented.”
With regard to Asset purchase agreements and other corporate transactional contracts, these agreements might include what is known as a material adverse change clause (also known as a MAC or material adverse event (MAE) provision) in place of or in addition to an act of God or force majeure clause. A MAC clause, for example, might give the buyer in an asset purchase agreement the right to terminate if the target business being acquired is materially and adversely affected by certain events occurring in a specific time period. Once again, in this context the recent coronavirus outbreak might be interpreted to be such an event and the parties will therefore need to be properly advised as to the enforceability of their asset purchase agreement terms.
If you are considering declaring and enforcing a force majeure event in order to be released from an agreement (asset purchase, employment, business or any other contract), because of the coronavirus outbreak or if any party is attempting to invoke a force majeure clause against you in an existing contract because of the coronavirus outbreak, you should carefully review your agreement and consult with legal counsel as soon as possible. Just as importantly, if you are creating or entering into any new contracts, or wish to draft addendums or modify any existing contracts, you should seek legal advice. A proper force majeure clause might be the most important language in your agreement and be a matter of economic life or death in these trying times, presently and in the months to come.