Coronavirus or COVID-19 Relief: Force Majeure and Insurance
Now is a good time to review force majeure clauses in contracts in an attempt to manage and understand performance obligations in light of the coronavirus or COVID-19 outbreak.
Force majeure clauses may excuse performance of some or all contractual obligations if certain events occur that are beyond a party’s control, that it did not cause, and that it could not have anticipated.
For example, some bar, restaurants, night clubs, and other music venues may be entitled to relief from or modification of their contractual obligations, including payments to BMI, ASCAP, and SESAC, due to the coronavirus or COVID-19 outbreak.
Generally, force majeure clauses specify: events that allow either party to declare force majeure; procedures either party must follow to notify the other party about the occurrence of a force majeure event; and the consequences of declaring force majeure, such as a termination right for the non-impacted party.
Businesses should review any force majeure clauses in their existing contracts to determine whether an epidemic, pandemic, government action, or supply chain disruption is included in the definition of a force majeure event. Businesses should also review how courts have interpreted force majeure clauses under the applicable state law governing each contract.
Under Illinois law, there is an implied duty to make an effort to attempt to resolve the event causing delay or inability to perform under the contract before invoking a force majeure clause. This duty is related to the duty of good faith and is read into all express contracts unless waived.
Businesses seeking to invoke the force majeure clause of their contracts have a strong argument that a coronavirus or COVID-19 outbreak is an unforeseen event, unless the parties entered into the contract after the outbreak of a coronavirus or COVID-19.
Given the fact that some governments have declared emergencies and implemented lockdowns, businesses may argue that performance under their contracts is impracticable or impossible. However, whether businesses have attempted to perform their contractual duties despite a coronavirus or COVID-19 outbreak, and whether that is required under a particular contract may be complex questions that must be assessed on a case-by-case basis.
If a party is unable to successfully utilize a force majeure clause to excuse performance during the coronavirus or COVID-19 outbreak, or if a contract does not contain a force majeure clause, other options may still potentially be available to excuse performance, such as the defenses of impossibility and impracticability. For example, the Uniform Commercial Code (UCC) provides that a seller is excused from performing under a contract when “performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.” The Restatement (Second) of Contracts defines impossibility as “not only strict impossibility but impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved.”
If an impossibility or impracticability defense is not available, another possible defense for a party unable to fulfill its obligations under a contract due to a coronavirus or COVID-19 outbreak is frustration of purpose. For the doctrine to apply, the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense. Put differently, frustration of purpose occurs where a change in circumstances makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract. Notably, economic hardship such as an increase in the cost of performing under a contract is not enough to assert a frustration of purpose defense.
Now is also good time to review insurance policies provisions, including force majeure provisions, in an attempt to determine insurance coverage for business interruption losses and claims caused by the spread of a coronavirus or COVID-19.
Business interruption insurance may cover losses resulting from interruptions to a business’s operations, and generally covers lost revenue, fixed expenses such as rent and utility, or expenses from operating from a temporary location. These policies most frequently relate to physical property damage. However, businesses should assess their coverage to determine whether they might be covered for losses due to business interruptions resulting from a coronavirus or COVID-19 outbreak. While some companies were able to recover for losses through business interruption insurance for various operational disruptions after the global outbreak of Severe Acute Respiratory Syndrome (SARS) in 2002-2003, many insurers have now excluded viral or bacterial outbreaks from standard business interruption policies.