As a result of the current pandemic gripping the United States and the world, companies everywhere have been overwhelmed by the loss of customers and the need to reduce operations, layoff staff, and transform their businesses in ways they could never foresee. The loss of business caused by the COVID-19 pandemic has put many businesses in jeopardy of defaulting on contracts, either because of an inability to pay, lack of demand, or both.
As a business owner, you must consider your options and potential remedies. One ancient doctrine of the law – that of force majeure – offers some guidance on how a business may achieve some relief from obligations that have now become exceedingly difficult due to circumstances not contemplated by the parties at the time of contracting.
“Force majeure” – from the French for “superior force” – is a legal doctrine that excuses a party’s nonperformance under a contract when extraordinary events prevent a party from fulfilling its contractual obligations.
Courts considering the applicability of a force majeure clause look to similar elements:
- whether the event qualifies as force majeure under the contract;
- whether the risk of nonperformance was foreseeable and able to be mitigated; and
- whether performance is truly impossible.
The primary focus is on whether the clause covers the type of event that a contractual party claims is causing its nonperformance. Force majeure clauses are generally interpreted narrowly; therefore, for an event to qualify as force majeure it must be outlined in the clause at issue.
Even if force majeure applies, a party is under an obligation to mitigate any foreseeable risk of nonperformance and cannot invoke force majeure where the potential nonperformance was foreseeable and could have been prevented or otherwise mitigated. Furthermore, depending on the relevant contractual language and governing law, a party generally will be required to establish that performance is truly impossible rather than merely impracticable. This tends to vary by state; some jurisdictions may only require that performance be impracticable, and some contracts may set a different standard (e.g., performance is “inadvisable”).
Similar to force majeure, The doctrine of impossibility excuses both parties from their obligations under a contract if the performance has been rendered impossible by events occurring after the contract was formed. The requirements for the application of this rule are:
- The impossibility must be OBJECTIVE; and
- Objective impossibility occurs when the performance becomes
- LITERALLY IMPOSSIBLE
- for ANYONE because of circumstances beyond the control of the parties.
A frequently used example for law students reads as follows: X promises to sell Y his horse, but the horse dies before X can deliver the horse. The contract for the sale of the horse has thus become impossible to perform.
A party seeking to use the impossibility defense must prove three things:
- an unexpected event occurred after the contract was executed;
- the parties’ agreement assumed such an event would not occur; and
- the unexpected event made contractual performance impossible or impracticable to perform.
As the Virginia Supreme Court sees it, the law in Virginia follows the view that impracticability should suffice to satisfy the final element: “Ordinarily, a supervening condition that renders a promisor’s performance temporarily impossible will not release him from the duty of performing, but will only suspend that obligation…. This general rule is inapplicable, however, if the delay will make the promisor’s performance materially more burdensome…. In that instance, the promisor’s duty of performance is discharged rather than suspended.” (Long Signature Homes, Inc. v. Fairfield Woods, Inc., 445 S.E.2d 489, 491, 248 Va. 95, 99 (1994) (emphasis added).
In sum, force majeure and the doctrine of impossibility may provide a contracting party with a viable defense; however, these defenses present significant evidentiary challenges that require an experienced attorney. If your business is facing such difficulties, McCormick Law & Consulting is here to help. Please give us a call to discuss your contract, analyze potential solutions, and assist with the best path forward. We love working with business owners and entrepreneurs throughout Virginia and North Carolina.