Business Contracts: The Importance of Force Majeure Provisions in Light of the Coronavirus (COVID-19)

CATEGORY: Special Bulletins
CLIENT TYPE: Nonprofit
PUBLICATION: LCW Special Bulletin
DATE: Mar 17, 2020

Nonprofits should consider how the Coronavirus may affect the business contracts they have with third parties.  Many nonprofits have had to reduce or modify activities or cancel events.  Whether the nonprofit is entitled to a refund or whether it must pay the third party upon cancellation, will depend on the specific contract terms, including whether the contract has a force majeure provision.

A force majeure provision excuses a party’s performance of its obligations under a contract when certain events beyond the control of the parties take place.   In light of the current pandemic, we recommend that force majeure provisions be drafted broadly to include outbreaks, epidemics, and pandemics, in addition to other standard force majeure events, such as any fire, flood, act of God, war, governmental action, act of terrorism, natural disaster, or any major event beyond the nonprofit’s control.  A force majeure provision should also clearly explain the obligations of the parties regarding payment for services when there is a force majeure event.  If the force majeure provision does not clearly state that the nonprofit will not be liable to the vendor or third party for payment if the vendor or third party is not able to perform services, there is a possibility that the nonprofit may continue to be liable for payment despite not receiving the goods or services.

However, what if you’ve already signed the contract?  Review the contract to determine the following:

”        What is the timing for cancellation?

”        What are the penalties?

”        Does it have a force majeure clause and, if so, what does it say?

”        Does the contract have termination provisions?

Whether a cancellation or closure related to Coronavirus will be considered a force majeure event that excuses performance of the contract obligations will not only depend on the wording of the force majeure clause, but also on whether the nonprofit was required to close or cancel based on the direction of local health officials or other government officials.  For nonprofits that decide to close or cancel without such direction from local public health officials or government officials, it will be more difficult for the nonprofit to argue that the closure was beyond the control of the nonprofit.  Events that are not beyond the nonprofit’s control are not considered force majeure events, and will not excuse performance of the contractual obligations.

If the contract does not have a force majeure provision or the provision does not allow for cancellation in the wake of this pandemic, there might be other options for the nonprofit.

”        Consider cancelling the event sooner, rather than later, to avoid larger cancellation fees as the event approaches.

”        Can you work with the business to postpone the event or services?  If so, consider drafting an amendment to the original contract that modifies the original agreement to include a force majeure provision (in case the postponed event/service still cannot take place).

”        If the contract has a termination for convenience clause, consider cancellation as an option.

Most contracts include strict requirements to provide notice of force majeure events, cancellation or termination.  nonprofits should follow the requirements for giving notice in the contract to make sure the action is legally effective.

If a business contract does not have a force majeure provision, courts excuse a breach of contract (and the corresponding obligations of the parties) when an unforeseeable event makes performance impracticable or impossible. The doctrine of impracticability excuses performance of a contract obligation when an unforeseeable event makes performance extremely difficult or expensive.  The doctrine of impossibility excuses performance of a contract obligation when an unforeseeable event makes performance literally impossible.  Whether performance of a contract obligation in light of the Coronavirus pandemic is impractical or possible will depend upon the facts of each case, but application of the doctrine may relieve the nonprofits from paying for services it has not received.

Future Business Contracts

Not all insurance companies insure financial losses that occur due to a pandemic.  Therefore, nonprofits should include force majeure provisions in their business contracts to explain how the parties would handle such a situation.

While a force majeure provision can afford a contracting party some relief, it can also create a problem if it is ambiguous or too restrictive.  For example, a force majeure clause allowing nonperformance if an event occurs that makes performance “impossible” is a very high standard and may not excuse a party following government guidance.  Similarly, a force majeure clause defining a force majeure as an “Act of God” without defining an “Act of God” or listing events, leaves the clause to varying levels of interpretation.  A clause that defines a force majeure as a “pandemic” would be interpreted more strictly than one defining it as a “pandemic or threat of pandemic.”  nonprofits should carefully choose their words when drafting a force majeure provision.