Is COVID-19 an “Act of God” that Excuses Contract Performance?
Ordinarily, parties to a contract must perform their contractual obligations or risk being liable for breach of that contract. What happens when one of the parties becomes unable to perform its contractual obligations due to no fault of either party?
The longstanding law of contracts excuses performance or allows performance to be delayed, under certain situations. When performance is made impracticable or impossible due to an event that occurs outside of the control of the contracting parties, such as an “Act of God” or “force majeure” event, one or both parties may be able to legally avoid or delay performance. That is known as the doctrine of impossibility.
Many contracts explicitly incorporate provisions that excuse performance based on an Act of God. The Act of God clause and “force majeure” (French for “superior force”) provisions are contract provisions that identify what types of events will excuse one or both of the contracting parties from meeting their contract obligations.
What Constitutes an “Act of God”?
An Act of God is typically a severe weather event or a naturally occurring event that is included as one of several force majeure events that can excuse or delay performance. The force majeure provisions often excuse or delay performance based on Acts of God events and based on unusual human-caused events. Human-caused force majeure events typically include an explosion, an act of terrorism, or a government action such as expropriation, condemnation, and changes in laws and regulations, which can significantly impair a party’s ability to perform under the contract.
Is COVID-19 an Act of God Under A Contract?
In many cases, businesses whose contract performance is impeded by the COVID-19 pandemic are relying on the Act of God clauses in their contracts in an attempt to avoid liability for completing their contract obligations.
Whether the Act of God clause will relieve parties from their contract obligations due to COVID-19 in part or in full is not clear. The analysis in every case depends on the wording of the contract itself.
Event Is Expressly Enumerated as an Act of God or Force Majeure Event
Some contracts identify epidemics as an Act of God event, but others do not. COVID-19 is an epidemic. If the contract includes epidemics as an Act of God, parties may have a strong defense against complying with the performance obligations.
Whether an epidemic is expressly listed as an Act of God in the contract may not be dispositive of the issue. The contract may enumerate governmental action as such an event. The government lockdowns and mandatory quarantines likely satisfy that provision.
If a contract does not enumerate the Act of God events, businesses can still prevail under the states’ laws. Some states’ laws recognize the Act of God defense and may identify the pandemic or the government’s responsive action as a force majeure event. An experienced contract law attorney can advise businesses on the merits of the case within a particular state.
Compliance with Contract Notice and Procedural Requirements
Some contracts have notice and procedural requirements that the parties must follow to assert an Act of God event. Failure to follow those provisions could impair a party’s ability to use the Act of God defense without a penalty or other remedy that may apply.
Refund Payment Will Likely Be Required
If either party has been paid for a performance that has not yet occurred, those amounts will likely have to be returned.
Effects of COVID-19 on Contracts
Excusing or delaying performance will not end the inquiry. The contract obligations will require businesses to evaluate the situation and take steps to mitigate damage.
Governmental Action. Governmental actions responding to COVID-19 have required many businesses to cease operations. Their workers have been ordered to shelter in place and stay home. Supply chains have been disrupted. Retail sales and construction projects have ground to a halt. The governmental action, not just the epidemic, is what impeded many businesses’ ability to perform.
The parties need to evaluate whether they could have foreseen the government’s action and taken reasonable steps to mitigate its impact. They will have to focus on questions pertaining to the practicality of completing performance once the government restrictions are lifted, or whether further performance obligations should be canceled and funds returned.
If the contract is ambiguous on the question, the parties should expect applicable state law to apply to resolve their obligations. The Uniform Commercial Code or other state statutes in most states recognize the defense of impossibility and provide appropriate remedies to resolve payment disputes.
Risk of Continuing Operations. For many businesses, performing the contract really is an impossibility. Their choices are to close down their business in compliance with government quarantine orders or continue operations in non-compliance with government orders. The risks of non-compliance include losing a business license, owing to significant fines and penalties, and operating at a loss. Additionally, the business could be creating an environment for its customers to transmit the disease.
Need to Refund Any Payment. If one contracting party has paid for payment that has not been rendered due to the epidemic or the government-ordered lockdown, the other party will be ordered to refund those amounts.
Review The Contract for Other Remedies. The contract also may include language that specifies what happens if performance is rendered impossible and the parties’ remedies. Other provisions to look for in the contract include:
- Liquidated damages clauses – any provision that specifies how much one party owes the other if the contract cannot be completed.
- Notice provisions – some contracts require the parties to provide notice to the other party pertaining to asserting the act of God clause or other non-performance matters.
- Choice of law – many contracts allow the parties to agree to be bound by a specific state’s law. That is the law that will govern legal disputes arising from COVID-19 non-performance.
Call the Contracts Experts at KPPB LAW
The COVID-19 pandemic has caused significant disruptions in the ability of businesses to complete their contractual obligations. In many cases, businesses will have a viable defense under applicable state law, but they need the assistance of experienced contract attorneys to analyze their contracts and determine how best to protect their business interests. Contact the experts at KPPB LAW to discuss how they can best assist your business.