The first place many will look to is the often-overlooked force majeure clause buried at the end of their contracts.
Force majeure clauses excuse performance for one or both parties due to an extraordinary event, one that is usually defined as an “Act of God.” While courts have typically limited these occurrences to extreme natural weather events they have never had to consider whether a pandemic with the global impact of COVID-19 should qualify as an Act of God.
As many U.S. cities, and even states, ordered the closure of “nonessential” businesses, beaches, parks, and recreational venues, many were left wondering whether the economic fallout that would inevitably follow might excuse performance for contracts they no longer needed or could fulfill, leading many to take a closer look at their contract’s force majeure clause for a possible way out.
Although most of the country is no longer under government-mandated “stay-at-home” orders, quarantines, business closures, or lockdowns, parties will certainly attribute certain contractual challenges to the temporary implementation of said orders rather than the virus itself. With many government orders now lifted, courts will be asked to determine whether the ultimate obstacle preventing performance was due to the temporary government closures or individuals opting to stay home in the face of a global pandemic.
Some thoughtful parties may have expressly defined an Act of God to include, or exclude, a pandemic, making the analysis of that particular contract’s force majeure clause a bit easier. But even if your contract’s force majeure clause did not directly expressly account for a global pandemic, alternative arguments such as the doctrine of impossibility and frustration of purpose may still excuse performance.
The doctrine of impossibility refers to situations when it is impossible for a party to perform its contractual obligations. Whether a party can successfully use the doctrine of impossibility as a defense is a factually intensive inquiry as Florida courts are reluctant to excuse performance that is merely inconvenient, profitless, and expensive.
COVID-19 and its indirect effects – such as government orders and supply chain deficiencies – provide a multitude of factual situations that may give rise to a defense based on the doctrine of impossibility. One key factual inquiry will revolve around when the parties entered into the contract. For example, China reported a cluster of cases on January 7, 2020. Thus, if a party entered into a contract after January 7, 2020, a court may find that, at the time the parties entered into the contract, they each assumed the risk or knew of the facts which led to performance being impossible, rendering the doctrine of impossibility defense invalid.
Business interruption insurance, a policy designed to cover the loss of income that a business suffers due to total or partial business closure, is another type of contract that policy holders will look to for relief. Whether COVID-19 can be interpreted to have caused a physical loss or damage to an insured’s property within the meaning of business interruption coverage provision is a question that many courts will be asked to answer.
Given COVID-19’s novelty, and its impact on the often-overlooked force majeure clause, we can expect parties to pay closer attention to how an Act of God is defined in future contracts. If you need assistance interpreting a contract that has been impacted by COVID-19, I strongly recommend consulting with an experienced business attorney to discuss your options moving forward.
The COVID-19 situation is ever-evolving, with new governmental measures being implemented each day. This article will be updated as quickly as possible as new developments arise. Readers should consult with counsel for the latest developments and updated guidance on this topic.
Rick Duarte is the owner of The Duarte Firm, P.A., where he focuses his practice on business law. He received his law degree from the Emory University School of Law and has been named a “Rising Star” in Business Litigation by Florida Super Lawyers for 2016 – 2020. Rick also serves as general counsel to emerging and medium-sized businesses, guiding clients through corporate governance, risk management issues, and strategic decisions where business and law intersect.