Since its initial discovery in Wuhan, China on 31 December 2019, the coronavirus outbreak has become a public health emergency of international concern. With more than 6,600 deaths and over 174,000 people infected in 122 countries around the world (all in less than 3 months), the outbreak has been rightly described as a public health crisis. Last Friday, the President declared a national emergency.
While the full impact of the outbreak, and the emergency measures it has necessitated, is still unfolding, the disruptions it has caused to local and international trade so far are painfully obvious.
Dun & Bradstreet report that at least 51,000 companies have one or more direct suppliers in the affected regions. And at least 5 million companies, including 938 Fortune 1,000 companies, have a minimum of one Tier 2 supplier in those regions.
Considering the nature of the outbreak, there are legitimate questions whether parties to commercial contracts may invoke force majeure provisions as a defense to non-performance.
Force Majeure Clauses Under Florida Law
Force majeure literally means “superior force”. It is a creation of a contract that anticipates events in which parties may be prevented or delayed in the performance of their obligations due to circumstances outside their control.
These clauses limit the liability of a party that defaults under a contract simply because the default was caused by a “superior force”. Accordingly, they should not be held liable for a breach that was not within their control and which they could not have prevented.
In the United States, there is no implied defense of force majeure. Rather, this defense is a creation of a contract and must be included in the contract to take advantage of its protection.
In Florida, a party relying on a force majeure clause to excuse non-performance or delayed performance bears the burden of proving that the event was beyond their control and without their fault. To establish this, they must demonstrate that:
- A force majeure event contemplated under the contract, and which is beyond their control, has occurred;
- The event has prevented, hindered or delayed their performance of the contract; and
- They have taken all reasonable steps to avoid or mitigate the event or its consequences.
Does the Outbreak Amount to a Force Majeure Event?
The position under Florida law is that a party cannot take advantage of a force majeure clause unless they can show the event was:
- Contemplated within the contract;
- Outside the party’s control; and
- The proximate cause of non-performance.
Contracts typically include a list of events that would amount to force majeure. However, most traditional force majeure clauses do not list viral outbreaks or pandemics as triggering events.
Events such as an “Act of God”, “natural disaster” and generally “anything beyond the reasonable control” of a party are commonly listed. But will the coronavirus outbreak fall within these?
An Act of God has been held to include an event that arises due to “natural causes, without human intervention and that could not have been prevented by any amount of reasonable foresight or care”. Considering this definition, it may be possible for a coronavirus outbreak to fall within an Act of God. It may also possibly fall within the catch-all phrase that parties usually include in the contract, but there is no guarantee.
It must be noted that courts generally construe force majeure clauses strictly. The catch-all phrase may be interpreted in line with the events listed in the contract, negating any intention to include events not within the nature of those listed.
Has the Outbreak Prevented or Hindered Performance?
Force majeure clauses are commonly interpreted to include only delays that fall within the doctrine of impossibility. The question in these contracts is whether the outbreak really hindered or prevented performance.
If there are other reasonable means through which performance can be secured, it is unlikely that protection will be available under the force majeure clause. Non-performance due to economic hardship is not usually regarded as being sufficient. The fact that performance could only be secured at higher cost may not be enough to protect a party from liability for non-performance.
The operative portions of the clause and whether the language used was “prevent” or “hinder” are critical factors which will determine how a court interprets the party’s obligation. However, events such as quarantine, infection and government measures (including suspension of travel, trade and business) may qualify if they could reasonably be contemplated within the triggering events under the contract.
While there is currently no clear answer to whether the coronavirus outbreak constitutes a force majeure event, it is a timely reminder to pay close attention to your force majeure clauses.
The definitions and scope of these clauses as well as whatever obligations may arise upon activation should be carefully noted. Contracts typically provide for giving of notice by the hindered party when force majeure events occur. This may operate as a condition precedent towards obtaining remedy under the contract. To be on the safe side, ensure that the other party is informed about hindering events once they arise.
In addition, keep in mind that to limit the possibility that the clause will be construed strictly, ensure it is drafted as broadly as possible.