Businesses throughout North Carolina are being hit hard by the novel coronavirus (COVID-19) pandemic. What is a “force majeure” clause and how does a force majeure clause in your contract help or hurt your business? Are there other contractual defenses, too? This post answers those questions.
“Force majeure” is a legal term that simply means a major force. This is often referred to as an Act of God or other major event like war or natural disaster. Sometimes it may refer to government orders, or even global pandemics.
Most contracts have a force majeure clause stating that if a force majeure occurs then the parties’ contractual obligations are waived without running the risk of a breach of contract. As a result, if a qualifying event occurs and you cannot perform, you may not be in breach. This is especially relevant now because of the possibility that the coronavirus pandemic qualifies as a force majeure.
This can be good or bad depending on your role in the contract. If the contract requires that you be paid but excuses nonpayment in the event of a force majeure, it’s bad because you may not be paid. On the other hand, if you are obligated to pay someone but cannot perform because of a force majeure, you are probably glad that there was such as clause.
There is no universal force majeure clause, however. The attorney who wrote your contract probably did not consider that there would be a global COVID-19 pandemic causing the complete shuttering of major sections of the economy. The force majeure clause in your contract (if you have one) may not address the situation we are in now. Indeed, most contracts specify the types of event qualifies as a force majeure – depending on the language of your contract, the COVID-19 pandemic might, or might not, qualify.
Thus, whether a force majeure clause applies to your particular business contract requires that the language of the clause be evaluated under the facts of your case. This is a detailed and fact-dependent review. Sometimes there is no clear answer and you need practical advice that on weighing the pros and cons of each course of action. For example, our office looks at what the best way would be to keep your business up and running while minimizing risk.
Though some attorneys are only considering force majeure clauses, they may be forgetting the basic contract defenses that apply to virtually all agreements in North Carolina. These are the legal doctrines of “impossibility” and “frustration of purpose.” Impossibility and frustration of purposes are additional defenses that may apply regardless of whether there is a force majeure clause.
Impossibility and frustration of purpose allow you to not be deemed in breach of a contract if there was an event that was not reasonably foreseeable that prevented you from performing, or if your performance has been rendered impossible by events not within your control. Does the COVID-19 pandemic qualify as one of these defenses? There is a good argument that it may.
One decision from the North Carolina Court of Appeals holds that if the impossibility arises out of the action of governmental authorities, you may have a defense to breach of contract. The court explained that it depends what the effect of the governmental action was on your business:
Whether governmental action will excuse a party from liability for nonperformance of a contract is a legal question for the court. .... Generally, such nonperformance will be excused where performance is rendered impossible by the law, provided the promisor is not at fault and has not assumed the risk of performing, whether impossible or not .... [I]t must also be shown that the party had not assumed the risk of the event that occurred. Moreover, in most cases it must be shown that the event was not reasonably foreseeable. This is true because the terms of a contract may be such that, expressly or by construction, one of the parties assumes the risk of subsequent governmental interference preventing his performance of his undertaking.
This comes from the case of Messer v. Laurel Hill Associates, 102 N.C. App. 307 (1991). There are many other cases in North Carolina addressing similar circumstances which our office has reviewed.
To summarize, the above case says that you must prove that the law (such as the COVID-19 stay-at-home orders of the state or county) renders your performance impossible, and that the contract had not contemplated the pandemic occurring (a fairly safe assumption in most cases). It must also be shown that the pandemic was not foreseeable at the time it was entered into. As to this last requirement, if the contract were entered into at the time the pandemic had already started, it may arguably have been foreseeable, though this probably does not apply to most contracts.
North Carolina has published jury instructions on these defenses. These are the legal explanations that are given to juries when deciding issues related to impossibility and frustration of purpose. These are linked here:
In conclusion, though there is no easy answer to how COVID-19 affects your business contracts, there may nevertheless be an answer. It will be the result of a review of language of your contract, the facts and circumstances surrounding your entering into it, and the benefits and risks of each course of action.
Our office has already advised numerous business owners on how force majeure clauses and the defenses of impossibility and frustration of purposes may be related to the COVID-19 pandemic.
DYE CULIK PC is a Charlotte, North Carolina law firm that advises small business owners, entrepreneurs, and franchisees in transactions and litigation. If you have a question about how COVID-19 affects your business, contact us at 980-999-3557 to see how we can help.
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