With so many protective restrictions on commerce, businesses and individuals are worried that they, or the other parties with whom they contract, will not be able to keep up with their contractual obligations. The unique, unprecedented circumstances of the coronavirus make it difficult to predict how courts will enforce contracts amid this economic upheaval.
For parties to written agreements, the COVID-19 pandemic’s effect on the enforceability of a contract will be determined by the contract’s force majeure provision.
Force majeure provisions excuse performance and allocate risk under particular circumstances, typically covering acts of God, disasters and other circumstances beyond the control of the parties. When evaluating whether circumstances like the pandemic are covered by a force majeure provision, the language of the provision “dictates the application, effect and scope of force majeure with regard to that agreement and those parties, and reviewing courts are not at liberty to rewrite the contract or interpret it in a manner which the parties never intended.”*
The courts’ refusal to create categorical rules and develop uniform case law defining the circumstances covered by force majeure provisions creates uncertainty. Without litigating, parties cannot be certain what events are covered by broadly written clauses that, for example, excuse performance for “any compelling reason not within the parties’ control.”
Though these provisions are analyzed on a case-by-case basis, Indiana case law does provide some insight to how courts interpret such language and whether it might cover the coronavirus.
In Specialty Foods of Indiana, the Indiana Court of Appeals reviewed a force majeure provision regarding a contract to provide food and beverage services to the College Football Hall of Fame in South Bend. The force majeure provision excused performance when prevented “by reason of strikes, lockouts, inability to procure labor or materials, failure of power, fire or other casualty, acts of God, restrictive governmental laws or regulations, riots, insurrection, war or any other reason not within the reasonable control of” the party required to perform.
Through no fault of either party, the Hall of Fame unexpectedly relocated to Atlanta, Georgia. The court held that performance was excused because the “any other reason” language was broad enough to cover the unforeseen relocation of the Hall of Fame, despite relocation not being similar to the specifically listed events.
Parties hoping to enforce obligations during this pandemic should be concerned by the holding of Specialty Foods. Ostensibly, a party could use this case to effectively argue that, like the unexpected relocation of the Hall of Fame, the coronavirus is an unforeseen, uncontrollable circumstance that should excuse performance. This argument, however, would only be applicable if the provision was broad enough to include the pandemic, meaning the clause would have to include a vague catch-all as seen in Specialty Foods. Moreover, the pandemic must actually be the circumstance that is preventing performance.
Keep in mind, “[t]he party seeking to excuse its performance under a force majeure clause bears the burden of proof of establishing that defense.” Id. at 27. Thus, while Specialty Foods could spell trouble for parties trying to enforce contracts, its rationale can only be applied to excuse performance if the party seeking relief proves that (1) the coronavirus was an unforeseeable event that was covered by the language of the force majeure provision and (2) the coronavirus was the direct cause of the party’s inability to perform.
While Specialty Foods provides an example of a force majeure provision excusing performance, it is important to remember that excusing performance is a drastic measure that courts disfavor. It is impossible to predict how courts will balance the importance of enforcing contracts with the due sympathy for the severity of the coronavirus.
Still, case law makes one point certain: courts will only excuse a failure to perform when the unforeseen circumstance is a direct cause of the failure. Therefore, parties should continue to honor their obligations as best they can and not use the coronavirus as a crutch. Going forward, individuals, businesses and their attorneys should stay up to date on the developments in this area.
Please contact your KDDK attorney or any member of the KDDK business law team for additional information and individualized guidance on this or any related matter.
*Specialty Foods of Ind., Inc. v. City of S. Bend, 997 N.E.2d 23, 27 (Ind. Ct. App. 2013).