Justified Nonperformance of Contracts in a Time of Crisis

Performance questions often arise between contracting parties in time of crisis and a clause that is often forgotten comes into focus. A force majeure or “Acts of God” clause is included in most contract and the language of this clause becomes critical at time of enforcement.

When applying force majeure clause language, the courts employ an extremely high level of scrutiny before excusing a party’s nonperformance. They will look at three to four key factors:

1. Notice: the exact language of the clause (which events are specifically detailed as justified excuses).
2. Genuine Surprise: the actual un-foreseeability of the specific event.
3. Cause: whether this event “actually caused” the impracticality of performance or did performance just become “more difficult”.
4. Severity: whether the event was “severe” enough to justify nonperformance.

For instance, a typical force majeure clause provides:

“[Event] … resulting in justified breaking of contractual agreement (payment or performance): strikes, lock-outs, embargoes, unavailability of labor or materials, wars, insurrections, rebellions, civil disorder, declaration of national emergencies, acts of God or other causes beyond such party’s reasonable control.”

In applying this language, the courts will consider:

President Trump’s recently declared nationwide health crisis and state of emergency on a national or federal scale due to the sudden but global COVID-19 pandemic. Applying this declaration and the ongoing health crisis to the description of events found in the above clause will likely not climb to a justifiable excuse for nonperformance for several reasons:

This clause fails to mention pandemic specifically. The pandemic and national health emergency may qualify as a reasonably unforeseen specific event at the time of signing this agreement. However, the courts will hold contracting parties to their specific contract language re: definitions. The court will not allow an excuse based on a broad reference to “Acts of God” or other causes “beyond party’s reasonable control”. Even if pandemic had been highlighted in the clause, the impracticability test approaches “impossibility” when courts review these issues to support excusable nonperformance. Therefore, the reader can assume nonperformance will not be justified or excused under this clause.

Not everything is bad news, however. One notable exception exists if the party can show the event, emergency, or catastrophe had a unique and direct impact on practical performance. For example, excusable nonperformance may apply if a key or essential person involved in the project has been ill (not self-isolated, but incapacitated) and unable to complete the project.

Bottom line: contracting parties should communicate clearly and often. Parties should work through difficulties and approach solutions collectively, and legal counsel should facilitate productive dialogue whenever called upon.