As businesses strive to stay afloat in the midst of the COVID-19 pandemic, many businesses are looking to existing contractual obligations to determine how and when they will be required to perform, and what they will be on the hook for in the event they are unable to do so.
Force majeure clauses are routinely included within contracts to protect both parties in the unlikely instance some unexpected event occurs that would materially impair the parties’ ability to perform. Although these clauses have rarely been relevant in the past and have therefore been overlooked as boilerplate, the COVID-19 pandemic has emphasized the importance of parties discussing the “what if” when entering into agreements.
One benefit of force majeure clauses is that they come in handy to protect the party that is unable to perform from facing claims for breach of contract and being assessed damages resulting from non-performance. On the other hand, the clause can protect the other party by offering procedures and timelines for exiting the contract if the non-performing party cannot perform because of the unexpected event.
Importantly, a force majeure event is different from a typical breach of contract scenario because the non-performance did not result from one party’s choice not to perform. Instead, a force majeure event occurs when one or both parties are unable to perform as a result of an act beyond their reasonable control, such as COVID-19.
If your business cannot perform under a contract due to COVID-19, either because of the disease itself or because of governmental responses to it, consider whether your existing contract has a force majeure clause, and determine whether procedures have already been agreed upon to handle such a situation.
If the contract does not include a force majeure clause, there are other options available to protect the party that is unable to perform. There are certain legal defenses available in the absence of a force majeure clause, such as, “frustration of purpose” and “impracticability.” If, for example, the entire purpose of the contract was for a service to be performed on a certain date, and there are government-imposed restrictions precluding the event from taking place on that date, that would frustrate the purpose of the contract and could serve as a basis to terminate the contract. If the contract cannot be performed because performance would be extremely difficult or supplies are unavailable given the impact to supply chains as a result of COVID-19, performance of the contract could be considered impracticable, and the non-performing party could seek to terminate the contract on those grounds. Maryland law is clear that the defense of impracticability is available for contracts involving the sale of goods, but there is no clear guidance with respect to other contracts, including contracts for provision of services and real estate contracts and leases.
Although force majeure clauses and other defenses may be available, the first step is to communicate with the other party to the contract. If the parties use common sense, issues related to non-performance, especially as a result of a pandemic, can hopefully be worked out simply by communicating with each other.
This has been prepared for informational purposes only and does not constitute legal advice.