Somewhere buried deep in most commercial contracts is a force majeure clause — more commonly known as an “Act of God” clause. These rarely-read clauses, often found in the boilerplate section of contracts, are finding themselves front-and-center as the impact of the COVID-19 outbreak cascades through the economy. These provisions may shift the ultimate risk of loss if COVID-19 impacts your business.
A typical force majeure clause may look something like this:
Force Majeure: The Parties shall each be excused from performance any obligations hereunder for the period of any delay beyond the obligor’s reasonable control caused by strikes or labor disruption, civil unrest, war or acts of terrorism, natural disaster, pandemic disease, declared national or regional emergency, government order or injunction, fire or other casualty, trade embargos or industrial disturbances, or other acts of God, provided that the party delayed provides prompt notice of any such delay as soon as reasonably practicable, and undertakes commercially reasonable efforts to minimize further delays, disruption, and resulting damages.
Are these clauses enforceable? Do they apply in situations like the COVID-19 outbreak? How do they work, and what relief will they provide? Generally, these provisions are enforceable, and they may apply to the current COVID-19 crisis. To answer these questions, review your contract and follow these steps:
First, look at the specific language of your force majeure clause. Does the COVID-19 outbreak (and resulting impact on society) match any of the circumstances described in the provision? Using the example above, several could apply. Remember, this is more than just a disease outbreak. It has blossomed into an international, national and regional emergency, coupled with government orders shutting down certain sectors of the economy. COVID-19 may eventually progress into broad shortages of labor and materials, or worse. Depending on the subject matter of your contract and the progression of the crisis, COVID-19 may impact you from multiple angles.
Next, Utah courts will require the party seeking relief to “connect the dots” between the crisis and contract, prove that the circumstances in question are beyond their reasonable control, and show they are unable to prevent or overcome the resulting hardship.[1] In a true natural disaster, the circumstances will obviously be beyond the control of the parties. However, you may still need to demonstrate that the disaster, and not some other factor, is the actual cause of the delay or nonperformance and show reasonable efforts to overcome the situation before the contract provides safe harbor. Remember, the force majeure clause is a defense of last resort, not a “get out of jail free” card.
Finally, determine what relief the clause provides. The example clause above allows the parties to delay performance until the calamity is over. Other clauses might allow a party to cancel the contract altogether. Ensure you understand your options and the options of the other party. If notice is required under your contract, and even if it’s not, be sure to give written notice promptly, citing the force majeure provision and explaining why it applies. Both parties should then take reasonable action to minimize the damage to themselves and the other party.
As the COVID-19 crisis continues, Parsons Behle & Latimer can help you understand your legal risks and options, to help you make sound decisions. To discuss this or other related matters, contact Alex B. Leeman by calling 801-536-6775 or send an email to aleeman@parsonsbehle.com.
[1] See Desert Power, LP v. Public Service Com’n, 173 P.3d 218 (Utah 2007)
