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Is the Effect of COVID-19 an Event of Force Majeure?
March 24, 2020


The novel coronavirus (COVID-19) is rapidly impacting the US economy and American society.  In a matter of weeks, we have seen states and localities ordering closures of restaurants, bars, small businesses, concerts, public gatherings, schools and universities. Many are, and should be, concerned about the ramifications of the virus and the government’s containment measures on their businesses as well as their legal obligations. Many contracts, including commercial leases; purchase and sale agreements; contracts for the sale of goods and services; and loan documents; contain a force majeure clause that excuses a party from performance of the contract for events outside that party’s control. Can COVID-19 and governments’ actions to contain the virus constitute an event of force majeure? It’s possible, but Idaho and Utah courts have yet to address an issue as unique as COVID-19. 

Generally, the types of events that constitute force majeure depend on the specific language included in the contract clause itself.[1] The force majeure clause is interpreted according to the same principles, and enforced to the same extent, as any other clause in a contract.[2] The language contained in a force majeure clause will be relied upon and analyzed in order to determine what constitutes a force majeure event, thus triggering the clause, and to determine its effect on a party’s contractual duties.[3] For example, some contracts may define what types of events can constitute a force majeure event, such as “unforeseeable causes beyond the reasonable control of and without the fault or negligence of the party claiming Force Majeure.”[4]  Other contracts may not provide for any definition and may simply refer to an act of force majeure.[5] In either case, a court will look to the express language of the contract to determine if an event of force majeure excuses performance of a contract. 

The party seeking excuse from nonperformance has the burden to prove that the force majeure clause should be invoked.[6] Generally, for a force majeure clause to be invoked by a party seeking to excuse nonperformance, certain prerequisites must be met:

  1. The force majeure event must be covered by the terms provided for in the contract’s force majeure clause.[7]
  2. The event must have reasonably been beyond that control of the party seeking to be excused from performance.[8]
  3. It must be determined what effect the force majeure event will have on the obligations of the party seeking to be excused.
  4. The party relying on a force majeure clause to excuse performance bears the burden of proving that the event occurred without its fault or negligence.[9]
  5. A party must provide notice of the force majeure event to the other party, if required by the contract.[10]

Desert Power, LP v. Public Service Com’n 173 P.3d 218 (UT App. 2007) is the only Utah case in which the court provides guidance on invoking a force majeure clause. In Desert Power, Desert Power, LP asked for review of an order in which the Commission determined that Desert Power could not be excused from performing its contract with PacifiCorp by virtue of an event of force majeure. The court concluded that the Commission’s factual finding that Desert Power was partially responsible for the delays it claimed were events of force majeure precludes Desert Power from qualifying for relief. Id. at 219. The court advised that in order to invoke a force majeure clause, the party must prove that the cause of the alleged event of force majeure was beyond the reasonable control of the party and that the party was unable to prevent or overcome it. Id. at 222. To prove this, the court recommended a party supply evidence regarding the scope and duration of the suspended performance attributable to the event of force majeure; and evidence that the party had used reasonable commercial efforts to overcome problems associated with the event of force majeure. Id. Furthermore, the court stated that a determination that a party’s own miscalculations, decisions, and actions affected or contributed to the outcome or event at issue in a force majeure action will preclude that party from qualifying for relief because where a party contributes to the event, it cannot be said that the event was beyond the party’s reasonable control or that the party was unable to prevent the problem. Id.

There have also been few Idaho cases addressing the applicability of force majeure clauses. In Burns Concrete, Inc. v. Teton Cty., 161 Idaho 117, 384 P.3d 364 (2016), a development agreement with the County required that Burns complete construction of a facility within 18 months of the date of the agreement, subject to “delays resulting from weather, strikes, shortage of steel or manufacturing equipment or any other act of force majeure or action beyond Developer's control.”  Id. at 120.  The agreement contained elevations requiring the facility to be 75 feet tall, so Burns, to comply with the agreement, was required to build a facility that was 75 feet tall. Id.  However, after signing the development agreement, the County subsequently denied Burns’ conditional use permit seeking permission to exceed the height limitation of that zoned area. Id. at 118. Overturning the district court, the Idaho Supreme Court found that the wording of the clause was not limited to the types of events mentioned, that the County’s conduct in denying Burns a conditional use permit was an action beyond Burns’ control and that the force majeure clause applied. Id. at 120-121.   

Currently, it is not clear where COVID-19 will fall under a force majeure clause to excuse a party from performance of the contract. Whether force majeure applies will depend on the facts and circumstances of each individual case. To determine the potential effects of COVID-19 on your contractual obligations, you should:

  1. Review the terms of your contracts to see if they contain a force majeure clause.
  2. If a contract does contain a force majeure clause, determine whether the contract or state law requires you to provide notice of the event of force majeure to the other party.
  3. If required, provide notice to the other party to the contract in accordance with the terms of the contract.
  4. Contact legal counsel to ensure you are complying with your contractual obligations and to seek guidance on how to best proceed.

The amount of protection afforded to a party in a force majeure clause is highly dependent on the specific language of the contract. It is crucial to evaluate your contracts now to determine whether COVID-19 and governments’ containment measures is a force majeure event and to evaluate how to protect your contractual rights.  For assistance, please do not hesitate to reach out to Christina Hardesty at (208) 562-4878 or send an email to chardesty@parsonsbehle.com.   

 

[1] 30 Williston on Contracts, Force Majeure Clauses, § 77:31 (4th ed.) (citing Maralex Resources, Inc. v. Gilbreath, 2003 -NMSC- 023, 134 N.M. 308, 76 P.3d 626 (2003))

[2] See Burns Concrete, Inc. v. Teton Cty., 161 Idaho 117, 120, 384 P.3d 364, 367 (2016).

[3] Maralex, 76 P. 3d 626, 636.

[4] See Afton Energy, Inc. v. Idaho Power Co., 122 Idaho 333, 338, 834 P.2d 850, 855 (1992).

[5] Burns Concrete, Inc., 161 Idaho at 120.

[6] Desert Power, LP v. Public Service Com’n, 173 P.3d 218, 222 (2007).

[7] P.J.M. Declercq, Modern Analysis of the Legal Effect of Force Majeure Clauses in Situations of Commercial Impracticability, 15 J.L. & COM. 213, 230 (1995)

[8] IdSee also Desert Power, 173 P.3d 218, 222.

[9] 30 Williston on Contracts, Force Majeure Clauses, § 77:31 (4th ed.)

[10] Peter Godwin & Dominic Roughton, Force Majeure: Impartiality of the Engineer (Mar. 2006), http://www1.fidic.org/resources/contracts/godwin_ march06.asp