In A Time of Crisis: Consider Force Majeure and Business Interruption
Because of the Coronavirus crisis, many businesses are considering whether to modify, reduce or temporarily cease operations. This is a natural course of action and in many cases, these actions align with requests of local, state and federal government agencies. Many businesses are evaluating their ability to perform contractual commitments.
Before finalizing any decision on adjusting or closing operations, clients should review and consider the possible effects of the rule of force majeure, and the possibility of assistance from business interruption insurance.
Force majeure is a legal principle. It applies to some kinds of disruptive events that will excuse a party from performing a contract. It is sometimes described as requiring an Act of God. But it is not limited to just Acts of God or their equivalent. As one court said: delay or nonperformance of a contract may be excused “when the agreed-upon performance has been rendered commercially impracticable by an unforeseen supervening event not within the contemplation of the parties at the time the contract was formed.” A force majeure may include potentially any event that, in the circumstances, was a huge interference, occurring without the party’s fault, that no amount of care or diligence could have avoided. To excuse nonperformance, the event must cause the nonperformance.
Many business contracts have force majeure clauses. When an outside event interferes with performance, it is useful to review that clause. A contractual force majeure clause may excuse a party from performing, or permit delay in performance if the event is within the scope of the clause. The clause may state steps that a party is required to take, to invoke the clause’s benefits.
If a contract is silent about force majeure, that does not eliminate the rule of force majeure and its potential use to excuse nonperformance. California enacted force majeure as a rule of law. Civil Code 1511 states that performance of a contract is excused when “prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary.”
Many businesses are also facing the challenge of other parties to their contracts invoking force majeure. Just because a dramatic event occurs, and just because the other party claims it was prevented from performance, does not automatically make that so. A company faced with nonperformance by the other party, may be able to identify steps the other party could take, to continue its performance and comply with the agreement.
Apart from force majeure, many businesses have insurance packages. Many of these packages include coverage for “business interruption.” This insurance protects earnings that the policyholder would have enjoyed had there been no interruption of business. Stated differently, it protects earnings that are lost or diminished because of business interruption.
Before announcing a closure or reduction in work a business should check their insurance to see if it includes business interruption coverage. The closure or reduction may validly be positioned as fitting within the scope of that coverage. In contrast, if the business publicly attributes its closure or interruption to something outside the policy’s coverage, that statement may be an admission that results in denial of the policy benefit.
David Gurnick is a business litigation attorney and California Bar Certified Specialist in Franchise & Distribution Law.