Businesses around the world are experiencing problems with productivity. The COVID-19 pandemic has resulted in many workers self-quarantining so they are not exposed to the virus. Warehouses, factories, and other businesses have also shut down in an attempt to slow the spread of the virus. Due to this, many business owners are now wondering if they are obligated to fulfill the responsibilities outlined in certain contracts, or if they can invoke a force majeure clause to excuse performance on a temporary or permanent basis. It is crucial that all business owners understand how force majeure clauses work, when they can be invoked, and the other options available.

Understanding Force Majeure Clauses

Contracts sometimes include force majeure clauses that excuse one or both parties from their contractual obligations. For a force majeure class to be enforceable, the circumstances must be beyond the control of the parties and make performing their obligations within the contract impossible or impractical. The events covered under force majeure clauses include:

  • Acts of God, including severe weather events such as floods, earthquakes, fires, hurricanes, or other natural occurrences,

  • Acts of terrorism and war,

  • Epidemics and pandemics,

  • Orders from government bodies that change the law or regulations, and

  • Certain accidents.

Like all clauses within a contract, force majeure clauses are not always enforceable. When making the determination about a certain clause, it depends on the language within the contract. Force majeure clauses are usually interpreted quite narrowly and the definition is confined to the specific matters contained within the clause and is not to be expanded. The reasoning for this is due to the fact that the parties named within the contract have typically defined the scope of force de majeure clauses themselves and so, are bound by them.

Force Majeure Clauses in California

Contract law in California does not limit force majeure clauses to only acts of God. Instead, when determining if a force majeure clause is enforceable, a court will determine if the circumstances keeping one party from fulfilling their obligations could have been prevented with reasonable diligence, care, and prudence. 

As was found in Butler v. Nepple, expenditure increases are also not considered enough to excuse a party from fulfilling contractual obligations. An extreme and unreasonably difficult injury, expense, or other loss must have occurred that kept one party from performing their duties as outlined within a contract.

According to the language within a specific contract, a party may also be required to provide adequate notice prior to invoking a force majeure clause. When this type of language is included and a party does not provide sufficient notice, it could preclude the successful invocation of a force majeure clause.

Business owners who want to invoke a force majeure clause during the pandemic can likely argue that the COVID-19 crisis has created an unforeseen event that has affected their business. Due to the fact that the COVID-19 crisis has been declared a pandemic, such language in a contract may automatically trigger a force majeure clause. Unfortunately, few contracts include ‘pandemic’ as a reason for invoking a force majeure clause. Typically, force majeure clauses only include language such as, ‘acts of God’ or ‘acts of government.’ Although the courts in California have not yet come to an agreement on the applicability of force majeure clauses in the context of a pandemic, it is difficult to understand how one could argue such a situation does not apply to COVID-19. While the first cases are just now starting to appear in court, the decisions made in those cases support force majeure provisions due to the closures the pandemic has forced, along with government orders. 

An exception to this could be found in the event that a business entered into a contract with another party after the outbreak of the virus. When determining if a force majeure clause is enforceable, a court may also determine if the business owner tried to perform their contractual duties amid the pandemic, or if such an attempt is even necessary within a force majeure clause.

Force Majeure Clauses and Other Options

Although force majeure clauses provide a way for business owners to protect themselves in the event that they cannot fulfill contractual obligations, these provisions are not always included in contracts. When that is the case, business owners still have options.

California has largely adopted the Uniform Commercial Code (UCC), which governs all commercial transactions in the United States. While it is not a federal law, it is uniform law that states adopt. The UCC is so powerful it has been referred to as “the backbone of American commerce.” Under the UCC, sellers in a business transaction may be excused from performing their contractual duties when it is not practical to fulfill those obligations due to any government regulation, foreign or domestic. 

It does not matter if the government order is later found to be valid and necessary or not. As long as there was a government order in place that made it impractical for someone to operate a business, the UCC may protect business owners who do not have a force majeure clause in their contract. In California specifically, many government orders have been issued that have forced the shutdown of many businesses, even if only for a short period of time. While the entire state was essentially closed at the beginning of the pandemic, the focus is now placed on specific counties. Businesses within counties that have been ordered to close may use that under the UCC and argue that continuing business operations is impractical or impossible.

When a contract does not include a force majeure clause, and a business owner has problems showing that continued operations were impractical or impossible, there is still one more defense available. That is the frustration of purpose doctrine. In order to use this defense, a business owner must show that a frustration of purpose, or change in circumstances, causes one party’s performance to become worthless to the other party.

For example, restaurants rely on food wholesalers and suppliers to run their business. A restaurant in a locked-down county in California may have to close, so they no longer need the food the supplier delivers to them. In this instance, the restaurant owner may be able to argue that they had no reason for the food and so, the supplier’s products are worthless to them. As such, the restaurant owner may be able to use the frustration of purpose defense if the supplier claimed they were in breach of contract.

It is important that all business owners know that economic hardship is not enough to use the frustration of purpose defense. In the above example, the restaurant could not use the defense if they were able to remain open but saw a drop in customers anyway due to the pandemic.

Call Our California Business Lawyers Today
The pandemic has caused immense stress for business owners throughout the state, and many have been left unable to fulfill their contractual obligations. If you need to enforce a force majeure clause, or you need to draft a contract that will protect your interests at all times, ourSanta Monica business lawyers at Klein Law are here to help. Call us today at (310) 295-2261 to schedule a meeting with one of our skilled attorneys and to learn more about how we can help.