Globally, businesses are experiencing massive productivity issues due to Coronavirus (COVID-19) pandemic. Employees are working-from-home, self-quarantining and social distancing to prevent risk of exposure.
In addition to employee unavailability, manufacturing facilities are shut down or some have even converted their facilities to manufacturing different products in order to support the growing demand for certain products such as ventilators and face masks. Most of this is government mandated or strongly urged as steps to slow the spread of Coronavirus (COVID-19) pandemic.
Other issues arising in this context are does force majeure excuse a Company from paying employees severance if the Company was unable to maintain them on payroll due to the Coronavirus (COVID-19) pandemic?
In light of this, many companies are forced to seek relief from their contractual obligations, looking specifically at invoking a force majeure provision to excuse performance temporarily or even permanently. This article reviews force majeure law, focusing particularly on the State of Georgia. We also discuss the options available aside of force majeure.
Georgia Force Majeure Clauses
A force majeure clause is a contractual clause which excuses one or both parties to the contract from performing obligations if and when something occurs that is beyond their control and makes performance of those obligations impractical or impossible.
Events triggering a force majeure are often listed in the contract and frequently include the following:
1. acts of God, such as natural disasters including floods, fires, tornados, earthquakes, hurricanes, and other weather disturbances;
2. war, acts of warfare, terrorism, threats of terrorism and disease or medical epidemics and outbreaks;
3. strikes, civil disorder, labor disputes and disruptions; and
4. acts of government authorities such as the taking of one’s property, also known as eminent domain, censure, and changes in laws and governance; and
5. some accidents or mishaps. However, normally economic hardships on their own do not qualify as a force majeure circumstance.
The specific language in a contract will determine if a force majeure provision can be invoked. However, this requires a fact intensive analysis and force majeure clauses are narrowly interpreted.
Specifically, the provision is interpreted in light of its original purpose meaning that they are viewed with items of the same nature, such as the items mentioned throughout the contract. It limits damages where the obligations to perform have been frustrated and made impossible or impractical.
Georgia Law: Coronavirus (Covid-19)
Under Georgia law, two provisions stand out for those seeking to excuse performance due to the coronavirus under a commercial contract in the absence of words such as “epidemic,” “pandemic” or other similar variations: (1) the “act of God” clause in contracts and (2) the “act of God” defense to contractual breach (O.C.G.A. § 13-4-21). While the words “pandemic” and “epidemic” are not normally specified in contracts, “acts of God” and force majeure provisions usually make their way in as a means of contractual relief.
“Act of God” in Contract:
Frequently in contracts, the “act of God” provision is included in the force majeure clause and lays out when a party may cease its obligations to perform. Without the addition of words like “pandemic” and “epidemic,” the “act of God” provision might be your saving grace. However, don’t get too excited as Georgia case law is silent on whether something like the coronavirus counts as an “act of God.” Further, some “act of God” clauses limit even what qualifies as an actual “act of God.”
Even though Georgia case law is currently silent on this topic, as these cases start making their way through the courts, we are likely to see varying judicial outcomes and verdicts. Specifically, Georgia case law outlines an “act of God” as one that is not human caused and not reasonably predictable or avoidable. As the facts of this pandemic come to light, this test will be argued in many different ways. Moreover, the California Department of Public Health has stated that the source of the virus is not yet known.
Ultimately, the contract itself will first guide parties and courts regarding obligations to perform, but it is still unknown how these exact terms might be interpreted due to COVID-19.
“Act of God” Defense:
A contract does not have to include a force majeure clause in order to invoke the “act of God” defense.
O.C.G.A. § 13-4-21 of the Georgia Code states that “[i]f performance of the terms of a contract becomes impossible as a result of an act of God, such impossibility shall excuse nonperformance, except where, by proper prudence, such impossibility might have been avoided by the promisor” Additionally, O.C.G.A. § 1-3-3 defines “act of God” as “an accident produced by physical causes which are irresistible or inevitable, such as lightning, storms, perils of the sea, earthquakes, inundations, sudden death, or illness. This expression excludes all idea of human agency.” The real question due to this public health crisis will be how the words “irresistible or inevitable” and “excludes all idea of human agency” will be interpreted.
One item to note though is that the “act of God” defense requires the obligation to perform to be “impossible.”
Georgia Law: Recession
In 2008, the economic downturn that occurred and the consequential events that followed did not invoke the force majeure clause allowing Defendants’ to modify or cease their obligations under the Alliance Agreement. In the case of Elavon, Inc. v. Wachovia Bank, Nat. Ass’n, the court found no external force majeure thwarting Wachovia from performing its obligations under the Alliance Agreement. (841 F. Supp. 2d 1298, 1307–08 (N.D. Ga. 2011)). Even though the economic pitfalls facing the banking industry back in 2008 might have been beyond the reasonable control of Wachovia, Wachovia did have control over the decision to extend the Wells Fargo-First Data contract.
Other Options if No Force Majeure Clause or Unable to Utilize:
If you are unable to employ a force majeure provision to modify or cease your performance during this coronavirus pandemic or your contract does not contain one, there are other options that may be available to limit or excuse your performance.
If you don’t have a force majeure provision in your contracts, even if you do, you should not wait until this pandemic is behind us to state that the public health crisis prevented you from fulfilling your obligations of the contract. Even in the event of this crisis, if you do not make a timely claim, you might be waiving any relief you could have under the contract.
In common law, there are two doctrines known as the doctrine of impossibility and frustration of purpose. These are used in exceptional circumstances, which we are likely experiencing. The purpose of these doctrines is to provide relief when an event triggers a contract impossible to perform for reasons beyond the parties control. Typically when this occurs, the obligations under the contract are excused and not just extended. While not a perfect remedy, these doctrines can provide some sort of relief in the event your contract does not contain a Force Majeure provision.
Since many governments of numerous countries, with the United States being no exception as a national state of emergency has been declared, have enforced strict lockdowns, businesses should be arguing that their failure to perform their obligations in the contract have been made impossible/ impractical. To name a few states, California, Illinois and Washington governors have all ordered the closing of bars and restaurants, and some mayors of specific cities like Los Angeles and New York City have ordered the same thing in order to try and halt the spread of COVID-19. Some states have even issued “shelter in place” orders. These are all factors that reinforce the impossibility/impracticability defense.
Further, the frustration of purpose defense can be used when it doesn’t make sense anymore for the obligations of the contract to be followed. Stated differently, this occurs when the circumstances have changed making the obligations under the contract not even worth it for the other party. Even with the coronavirus though, businesses should be mindful that items like an increase in performance costs and other economic hardships typically are not enough to argue a defense of frustration of purpose.
At this time, the coronavirus is having a significant impact on businesses and their abilities to fulfill their contractual obligations. However, businesses requirements to perform under their contracts will have to be evaluated on a case-by-case basis due to the fact intensive analysis to determine if the force majeure provision applies or if an impossibility/impracticability or a frustration of purpose defense can be invoked. Contracting parties will have to review their specific language first and then applicable law in order to determine if their obligations can be modified or ceased.