Aside from the human toll from COVID-19, the U.S. economy has struggled to adapt its laws and course of commerce to function in a challenging business climate. At the heart of this disruption are corporate leaders questioning contractual performance obligations with business partners, and if, when and how contingent contractual terms might apply to offer some protection. The performance equation may have become further complicated by CARES Act[1] relief received, and other governmental economic stimulus benefits designed to ease the effects of COVID-19 and promote business continuity.

Translated literally from the French phrase, “force majeure” means “superior force”. In short, the legal doctrine currently provides contractual performance excusal or suspension without constituting a breach of the contract, if an event occurs beyond the reasonable control of the parties rendering the performance of the contract impossible or impractical, unless the contract provides otherwise.

Many corporate leaders believe they have come prepared for nonperformance issues with boilerplate “force majeure” clauses in their commercial agreements. While the failure to include a force majeure clause in commercial contracts puts a party at risk of being in breach of the contract for inability to perform, the use of “standard” force majeure clauses may not necessarily prevent liability from COVID-19 nonperformance. Of decisive importance is the language of the force majeure clause itself.

In any event, consideration of COVID-19 and its effects remain a matter of first impression to the court system, and much of the guidance is being written in real time. Applicable common-law doctrines for interpreting contract performance based upon supervening events will still be a centerpiece of any decision. These doctrines generally fall into four legal categories: (1) Force Majeure; (2) Impracticability or Impossibility; (3) Frustration of Purpose; and (4) Supervening Illegality.

The starting point to evaluating force majeure application is to know the subject contract terms – is there a specific Force Majeure clause? What does it say relative to the event at issue? If there is no formal force majeure clause, are there other applicable contract clauses or language which reference similar contingencies to performance (e.g., “hardship” or “adverse material change” clauses)? Such terms may not contain the exact “force majeure” phrase or wording, but may nevertheless be actionable. Customary force majeure language includes wars, riots, strikes, acts of terrorism, floods, weather conditions, natural catastrophes, governmental acts or omissions, changes in laws or regulations, fire, explosion, and acts of God.

How precisely the force majeure clause is crafted to match the event in question is therefore closely related to its strength of enforceability. For this reason, many companies have modified their force majeure clauses to include (or specifically exclude) COVID-19 and future pandemics, epidemics, health disasters and quarantines. A well-drafted Force Majeure clause also contains clearly defined duties and consequences. This has customarily included mitigation obligations, notice provisions, suspension of performance during the force majeure event’s duration, excusing liability for nonperformance and in termination of the contract if the suspension extends beyond a defined period of time. Due consideration should also be given to the cost and feasibility of the alternatives to performance, as well as industry and competitor practices.

At the time of publishing this article, Minnesota courts have not yet considered COVID-19 in the context of a force majeure event. When it does, the court is expected to first evaluate whether the parties sufficiently referenced the event in the contract. If not, the court will look to discern the intent of the parties to include or not the COVID-19 event as a force majeure, as well as determine the reasonable foreseeability of the pandemic and its effects.

If the contract does not contain a force majeure clause or other similar language, the parties still have valid defenses to performance. A business could certainly argue that the many restrictions imposed by federal, state and local authorities due to the COVID-19 pandemic have prevented, frustrated or delayed performance “by operation of law”.

As Your Legal Department® we will continue to monitor the legal and business implications associated with the COVID-19 pandemic, as well as governmental efforts to contain the spread and relieve its effects. If you have any questions, please contact our team at Questions@JellumLaw.com.

[1] H.R. 748, CARES Act, Public Law 116-136 (April 16, 2020) as enacted on March 27, 2020.