Innovation@work: 5 Things to Know About Force Majeure and Other Contract Cancellation Doctrines


Innovation@work: 5 Things to Know About Force Majeure and Other Contract Cancellation Doctrines

The global COVID-19 pandemic is wreaking havoc across the world, not only from a community health perspective, but from a business one. Voluntary measures that were taken by some businesses to limit exposure and spread of the virus are evolving into government mandates for certain business closures in order to foster social distancing. Some small businesses have had to temporarily close or lay off significant numbers of their employees. Others are struggling with how to keep their workforce safe as they go about delivering necessary goods and services to the community.

These new and pervasive restraints on business operations will undoubtedly have an effect on commercial relationships, whether it is a business’ ability to perform its obligations to its customers or its suppliers’ ability to provide the necessary materials and services for that business to operate. As businesses are trying to deal with current interruptions or anticipated ones, here are 5 key things to know about force majeure clauses and other contract cancellation doctrines:

1. Not All Force Majeure Clauses Are the Same. Read them Over Carefully.

A force majeure clause is a provision contained in some contracts that suspends or excuses one or both parties’ obligation to perform in the case of extraordinary events, such as wars, natural disasters, government orders, terrorist acts, workforce strikes or shortages, and interruption in supply chains that are outside of the parties’ control. Pandemics and epidemics are sometimes included in these clauses, but not always. In light of the COVID-19 pandemic, even if the words “pandemic” or “epidemic” are not specifically listed, with increasing government intervention, there may be other triggers specifically mentioned in the force majeure clause that apply.

These clauses can also contain certain limitations or suspend only certain types of performance. For instance, the force majeure clause may require the party who cannot perform to try to mitigate the risk of non-performance. This is often the case in supply relationships where the supplier is expected to try to locate alternate sources or avenues for performance during the force majeure event. In lease agreements, the force majeure event may excuse a tenant’s non-performance of certain obligations, such as ceasing operations for a period of more than a handful of days, while still requiring the tenant to pay rent for the duration of the force majeure event.

For your key contracts with vendors and customers, read any force majeure clauses carefully to understand whether they have applicability to the business situation with which you are dealing and what limitations or additional obligations they may contain, including notice requirements.

2. Performance that Is Impossible Can Be Excused.

Even in the absence of a force majeure clause, there are several legal doctrines and remedies under the Uniform Commercial Code that excuse non-performance of a contractual obligation. The doctrine of impossibility is one of these doctrines.

The classic example of the doctrine of impossibility is this: If Jane hires Bob, a local painter, to paint her house for $5,000 and Bob is scheduled to paint the house on June 1st but the house is destroyed by fire on May 15th, then Bob’s performance is excused.

The remedy for impossibility is typically rescission of the contract, meaning that the contract is unwound and each party is restored to its original position prior to the time that the contract was made. Using the example above, if Jane had given Bob a deposit of $500 at the time that the contract was made, then she could be owed a refund of that deposit.

The doctrine of impossibility tends to be narrowly applied and limited to truly impossible circumstances. Increased cost for performing a contractual obligation may not rise to the level of impossibility.

3. Performance that Is Impracticable Can also Be Excused.

Impracticability can also be a basis for excusing performance under a contract. Impracticability arises in the situation where an intervening event makes performance of a contract substantially more difficult, complex or challenging to the point where performance would be commercially senseless. Again, increased cost alone may not rise to the level of impracticability. The intervening event must cause an excessive and unreasonable increase in performance costs.

4. Frustration of Purpose that Obviates the Original Reason for the Contract Can Excuse Performance.

Frustration of purpose is a limited excuse for performance when an intervening event frustrates a party’s reason for initially agreeing to the deal. For example, if a manufacturer engages an outside sale representative to sell the manufacturer’s product to a particular industry within a sales territory, such as the commercial fishing industry, and through government action, commercial fishing activity is substantially restricted or curtailed in that region, even though the sales rep could still go about trying to sell the fishing gear to commercial fishers, the decrease in activity within the industry has frustrated both the manufacturer’s goal to expand into that region and the sale rep’s goal of achieving new sales.

5. You Don’t Need Fancy Legal Doctrines to Amend or Terminate a Contract.

If all else fails, contracts are private agreements that can be amended or terminated at any time upon agreement of the parties. In uncertain times such as these, if you anticipate problem in being able to deliver a product or service to a customer, communicating those concerns with the other party and devising ways to either postpone delivery, modify performance or even terminate the agreement until the health crisis and its economic impact become more clear, are all viable options if both parties agree to that course of action.

As always, reach out to a legal advisor to discuss particular contract concerns for clear guidance on existing obligations and paths available for altering them.