The outbreak of the novel coronavirus disease 2019 (also called COVID-19) has led to many companies to anticipate nonperformance of their contracts. Some companies may breathe a sigh of relief knowing their contracts have “force majeure” clauses, but does COVID-19 qualify as such an event? In Minnesota, force majeure clauses are contract-specific and courts hold them to a high bar for invocation. For companies that do not contain a force majeure provision, handling a potential breach of contract will likely be even more challenging, requiring companies to look to the rarely enforce “frustration of purpose” doctrine. As the coronavirus outbreak continues to develop, we will continue to look at how it will impact you and your business. This article considers how force majeure clauses may guide your decision making processes for the foreseeable future.
What is a Force Majeure Provision?
Force majeure clauses typically excuse a party’s nonperformance under a contract when extraordinary events, such as “acts of god” or “event beyond parties’ control” prevents that party from fulfilling a contractual obligation. In Minnesota, events such as natural disasters (floods, tornadoes, earthquakes, and hurricanes) and acts of terrorism, riots, strikes, wars, and medical epidemics have been considered acts of god.
Minnesota’s Three-part Test
Minnesota applies a three-part test to determine whether to enforce a force majeure clause:
(1) the event qualifies as force majeure under the contract;
(2) the risk of nonperformance was foreseeable and could have been mitigated; and
(3) performance is truly impossible.
The primary focus is what is in the contract and what was contemplated by it. Minnesota courts focus on whether the event – here coronavirus pandemic – is specifically mentioned or contemplated in the text of the contract.
Even if the specific event is contemplated, the inquiry does not stop there. A party to a contract cannot get out of performing if it could have foreseen the event and, before or after, mitigated the nonperformance. Even more, if performance is simply inconvenient or economically difficult, but not impossible, courts tend to not enforce force majeure clauses. Minnesota courts interpret force majeure clauses more narrowly because they excuse one party’s performance and leave the other with the consequences of the unforeseeable event.
Coronavirus and Your Force Majeure Clause
Most force majeure clauses are often considered boilerplate in that they are included in most contracts, but the wording varies vastly. It may be important to consider what the precise language in the contract. This is not as straightforward as it may seem and an attorney should be consulted.
Certainly the COVID-19 pandemic is an act beyond a parties’ control and is probably one that was not anticipated. Still, the mere existence of the coronavirus will not automatically trigger a force majeure clause, unless the clause expressly lists “pandemics.” Without such a specification, courts may not find coronavirus to be sufficient to enact the clause.
Notably, even if a force majeure clause applies to the coronavirus outbreak, a party will still have to show the outbreak made its performance impossible and, when it learned of the pandemic, it took the necessary steps to mitigate the effects of the pandemic.
On the other side, a party disputing that coronavirus falls meets Minnesota’s stringent test for enforcement of a force majeure clause will surely dispute application of the clause. The party trying to compel enforcement or enforce the contract against the noncomplying party will likely argue a viral pandemic is foreseeable. As recently as 2005, the SARS epidemic infected over 30,000 people and resulted in 3,000 deaths. Similarly, the party may argue the novel coronavirus is akin to a particularly deadly strain of influenza, which is within the category of coronaviruses. In 2009, for example, the H1N1 “swine flu” strain infect 22 million Americans alone.
The party trying to enforce the contract will surely dispute the extent of the excused nonperformance, and especially whether performance was impossible. Simply, the question of whether COVID-19 was foreseeable and mitigation of damages was possible will likely be subject to debate. Some argue the pandemic was inevitable, but still unpredictable which some will certainly argue is a classic force majeure event. However, a party objecting to the application of a pandemic may point to the SARS epidemic in 2005 and argue that pandemics were from that point a foreseeable cause of nonperformance.
What If Your Contract Does Not Have a Force Majeure Clause or It Does Not Apply?
If a contract does not have a force majeure clause, or the clause does not apply, there are a few legal doctrines that may excuse nonperformance. The first is the doctrines of impossibility and impracticability in contracts under the Uniform Commercial Code. Impossibility and impracticability doctrines may excuse nonperformance if a party can establish that:
(1) an unexpected intervening event occurred;
(2) the parties’ agreement assumed such an event would not happen; and
(3) the unexpected event made performance impossible or impracticable.
The other doctrine is called frustration of purpose. To excuse nonperformance, it requires:
- an event substantially frustrated the principal purpose of the contract;
- the parties’ assumed the event would not occur; and
- the event was not the fault of the party asserting the defense.
While this article focuses on force majeure clauses, a follow up article will be published to discuss more on the common law doctrines. You can also reach out to our firm and we would be happy to discuss your contract with you and how to move forward without a force majeure clause.
What Should Your Business Do?
It is important that you analyze your agreements to see whether you have a force majeure clause and if so, the specific language and definitions within that provision. For example, does your clause define a pandemic as an event that falls under force majeure? If it does, are you required to give notice to the other party in the contract? If your contract does not have a force majeure clause, it may still be beneficial to consider giving notice to the other party and consider the theories available for those without a clause.
Businesses will want to closely monitor COVID-19 and take, and document, all reasonable steps to mitigate their effect on business operations. Examples of mitigating effects include: looking to alternate supply streams; planning for employees to work remotely; and mitigating the impact of restricted travel.
Your business should also review any insurance policies for the possibility of business interruption claims. More information on business interruption claims can be found here: Is there insurance coverage for coronavirus?
Undoubtedly, many companies may find themselves faced with litigation in the coming weeks and months as some parties attempt to excuse their nonperformance and others demand performance or damages. With seemingly inevitable disputes, our firm is ready to assist any questions you may have. Please contact us with questions.