The COVID-19 outbreak has ushered in a never-before-seen environment for businesses and individuals that has had an undeniable effect on the economy.
With the widespread, governmentally enforced shuttering of business operations, social distancing mitigation measures, stay-at-home orders, and travel bans, California businesses are exploring the possibility of relief from preexisting contractual obligations they have been rendered incapable of performing, or, on the other end, weighing their legal options if the opposing party fails to satisfy its responsibilities per the associated agreement.
Several existing commercial contracts incorporate force majeure clauses that provide guidance if conditions outside the control of either party affect the performance of either party. The following is a quick guide addressing what to examine if you expect the coronavirus will impact one of your commercial contracts.
Step #1: Determine Controlling Law
If you are attempting to find out whether you or the opposing party will be excused from your contractual obligation due to the global viral outbreak, the first issue to consider is what specific jurisdiction’s laws dictate the contractual terms. Certain contracts include a specifically enumerated choice of law clause that names which state’s law will be applicable in the event of litigation. If the contract lacks such a clause, it will most likely be controlled by the state law in which the contract was executed or where the actions addressed in the contract will be carried out.
Based on the controlling law, also consider taking advantage of common law defenses including impossibility, impracticability, or frustration of purpose. California jurisprudence has established that impossibility and impracticability are applicable when “an unforeseeable event outside the parties’ control renders performance impossible or impracticable.” Frustration of purpose is an option in California cases where performance remains possible, however, “the whole value of performance to one of the parties at least, and the basic reason recognized by both parties, for entering into the contract has been destroyed by a supervening and unforeseen event.”
Step #2: Personalize the Force Majeure Clause
A force majeure clause is a contractual element meant to offer a certain degree of liability protection to the parties if there is an unforeseen event that renders either side incapable of performing their contractual obligations. Although a contract may incorporate a force majeure provision, that does not, on its own, provide enough detail for a court to determine if the event at issue is a “covered event.” If you list specific events, they will qualify as covered, but if you leave it open-ended you may not be able to invoke the provision based on your specific jurisdiction.
For example, some jurisdictions will interpret force majeure clauses narrowly, meaning that only the occurrence of the explicitly listed events would enable a party to claim force majeure in defense for breach of contract. California, however, takes a broader stance and any event (even if not specifically named in the contract) can be covered as long as it was unforeseeable at the time the contract was signed.
Step #3: Implement Damage Mitigation
Although the force majeure clause covers the initial event, you may not neglect to mitigate to the greatest degree that is reasonable the resultant damage that is a direct result of the nonperformance of your contractual obligations. California law mandates that even a party that successfully invokes the force majeure defense must show that they extended “sufficient” or “reasonable” effort to alleviate the negative impact of a covered force majeure event. If it becomes apparent that you will be unable to fulfill your contractual obligations, but you expect that you may be excused via force majeure, impracticability, or frustration of purpose—and your good faith efforts to find an informal resolution have proven fruitless—you should weigh the option of filing a motion for declaratory relief.
Even though most courts have capped civil hearings, the issues of contract interpretation, impossibility, and frustration of purpose are all questions of law that the court can rule on without a jury. Instead of waiting to get sued by the other party, you have a chance to be proactive and frame the issues on your own terms.
