Recently, due to the COVID-19 pandemic, many parties to a commercial contract have been unable to perform their contractual duties and obligations under the contract. As a result, they desire to terminate the contract or the contractual relationship.
If a party to a contract is unable to perform a required obligation under a contract there may be specific terms included in the contract directly addressing the failure to perform. These terms may excuse one or more of the parties from the required performance or may be invoked to terminate the contract.
One contract clause or term to look for in a contract which may terminate the contract without breaching the contract for non-performance is a ‘force majeure’ clause. This clause operates to terminate a contract, or excuse a party’s non-performance of a contract, upon certain defined events. These events generally include ‘acts of God’ such as a war, terror attack, hurricane, earthquake or other similar type of catastrophic event that is beyond the direct control of a party and which adversely affects that party’s ability to perform the contract.
A force majeure clause is only enforceable if the event described was ‘unforeseeable’ by the parties when they entered into the contract, and it’s scope and breadth is limited to only the specific events listed in the force majeure clause in the contract.
For example, the word ‘pandemic’ is required to be recited in the force majeure clause in the contract if a party is relying on the force majeure clause to terminate the contract during the recent COVID-19 pandemic. Also, the parties must not have foreseen or known about the COVID-19 pandemic when they entered into the contract. If the parties entered into the contract after the start of the COVID-19 pandemic, or during the pandemic, or at a time when they reasonably should have known about the pandemic, the force majeure clause is then unenforceable in relation to the COVID-19 pandemic.
Also, a force majeure clause is not enforceable unless it is ‘impossible’ for the party invoking the clause to perform as required under the contract. If there is any possibility of performance of the contract (even a very remote possibility), the force majeure clause will not excuse non-performance by the invoking party or will not serve to terminate the contractual relationship.
Due to the very limited circumstances in which a force majeure clause will excuse a party’s non-performance of their contractual duties or terminate a contract, the invoking party must give notice to the affected party under the contract as soon as possible after the force majeure event occurs. This notice will generally be met with a response from the affected party questioning the forseeability of the force majeure event and whether the performance of the contract duties are truly impossible.
Invoking a force majeure clause to terminate a contract is an inherently factual question which will be decided by the specific facts and circumstances surrounding the transaction and the parties to each contract. Invoking a force majeure clause may require a third-party decision maker such as a mediator, arbitrator or judge to determine if the terms of the force majeure clause are applicable to the situation.
Unless the facts of the situation clearly and specifically match the force majeure requirements in the contract, and the other requirements to enforce a force majeure clause under state laws are not in dispute between the contracting parties, invoking a force majeure clause to terminate a contract may not be the most effective or economical method to terminate the contract during the current COVID-19 pandemic.