COVID-19 Might be an Act of God That Voids Business Contracts
It’s possible that some businesses in Hawai‘i will try to claim that circumstances surrounding COVID-19 absolve them of obligations under a business contract.
Whether they have a good case depends on the contract’s language, the obligation at issue and the impact that COVID-19 has had on that party’s ability to perform its contractual duties, according to Mark Ito, an attorney at the Honolulu firm of Schlack Ito.
Attorney Brian Tilker says some business contracts contain a force majeure clause, which he defines as a clause that “excuses a party’s nonperformance when ‘acts of god’ or other extraordinary events prevent a party from fulfilling its contractual obligations.” Economic hardship alone, he adds, is generally not enough to trigger a force majeure clause. Tilker specializes in business and employment litigation at Torkildson, Katz, Hetherington, Harris & Knorek, Attorneys at Law.
Depending on the contract’s language, this clause can be used to delay or avoid the performance of contractual obligations. Force majeure clauses are mostly seen in lease agreements and in some contracts dealing with sales of goods, he says: “Typically, if you’re providing a service or sale of goods, you try to get that type of language in there because you want a documented clause in the contract that gives you a reason to avoid performance if it becomes impossible or impractical.”
Tilker says many contracts do not specifically list epidemics or pandemics as events that qualify for force majeure. However, they often list government laws and regulations as qualifying events that render contractual performance impossible or impractical, or they might include a catch-all provision that the coronavirus may fall under.
“Hawaiʻi businesses that have been deemed nonessential by the government may have a viable argument that a force majeure event has occurred,” he writes in an email.
He adds: “Whether a force majeure clause may be triggered by the COVID-19 pandemic requires a case-by-case analysis centered around a careful review of the force majeure provision itself, the contractual obligation(s) at issue, and the specific factual circumstances that lead a contracting party to believe that performance under the contract is not possible.”
Ito writes in an email that other legal principles beyond force majeure may come into play when contracts cannot be fulfilled and that a lawyer should be consulted about specific situations.
How to Proceed
The process to declare a force majeure depends on the contract’s language, Ito writes.
Tilker writes that contracts generally list specific notice requirements, such as the form in which the notice of termination or postponement should be delivered, and where and how soon the notice should be sent. That notice should also specify the section of the contract being relied upon and the reasons why a business believes that section is applicable.
He adds that businesses might want to deliver notices even if they are not contractually required. Those notices allow the other party to mitigate potential damages and offer alternative methods of performance.
In addition, businesses should carefully vet the language of their written notices. Contracting businesses, he writes, do not want their notices to suggest they are refusing to perform the obligations of the contract.
“With respect to unanticipated consequences of providing notice, contracting parties should use caution before asserting force majeure to avoid a premature claim for breach of contract or anticipatory repudiation” – that is repudiation of the obligations of a contract by one party before it is time for performance, he writes. “If the written notice of the force majeure event constitutes an anticipatory repudiation, then the nonbreaching party may be empowered to rescind the contract, or to treat the repudiation as a complete breach.”
The contract also might specify how any disputes should be resolved. Some options include mediation, arbitration or litigation. Tilker says another option is to informally resolve disputes.
“I think for the most part, people are triggering the force majeure clause to protect their rights because they want to make sure they give timely notice, but at the same time, whether the lawyers get involved or it’s just between the parties, they’re trying to find an optimal business solution given that both parties are equally having problems in this crisis,” he says.
If No Force Majeure Clause
Businesses should consult an attorney on the options applicable to their specific contract and situation, but one potential course of action is the “impossibility and impracticability of performance” defense, Tilker writes.
Under this joint defense, a business can be excused from a contractual duty when government regulations make performance impossible. The exception is when the risk of such an occurrence is specifically addressed in the contract. “The question in such situations is typically whether performance under the contract is impracticable because of extreme and unreasonably difficult expense, injury or loss,” he writes.
Another option is the frustration of purpose doctrine. Tilker writes a business would need to demonstrate a change in circumstances that makes its performance worthless to the other party. Economic hardship is generally insufficient to assert this defense, he adds.
The Bottom Line
Businesses should carefully review their force majeure clauses, Tilker says. While a clause might alleviate the business from certain lease obligations, it might at the same time require other obligations to continue. For example, businesses might still need to pay rent or other amounts due under a lease.
“From a practical perspective, any business that feels that it may not be able to fulfill its contractual duties should have a frank conversation with the other party about working together to find a solution as that may be the only alternative,” he writes.