Utah Businesses Show Increased Interest in Force Majeure Provisions in Light of the Coronavirus
Contact: D. Jason Hawkins
Over the last few months, the coronavirus (COVID-19) has wreaked havoc on our local communities and the Utah economy. It has resulted in the closure of restaurants, bars, public gatherings, schools and businesses, and disrupted critical manufacturing, shipping and supply lines. As a result, many businesses have wrestled with the question of whether they will be able to perform their contractual obligations.
Most commercial contracts contain a force majeure provision that limits damages or excuses performance when an “act of God” or other circumstances beyond a party’s control prevent that party from fulfilling its contractual obligations. In the past, parties negotiating contracts have often glossed over these provisions and perhaps even relied upon boilerplate force majeure language.
One of the effects of the coronavirus, however, is an increased level of interest in force majeure provisions. Businesses large and small are reviewing their contracts to determine whether they include a force majeure provision and whether any of their or the other party’s obligations may be excused by that provision. Companies are also looking for ways to expand and improve the language of their force majeure provisions in future contracts. As a result, many clients are asking how will Utah courts interpret a force majeure provision in a contract?
Unfortunately, Utah courts have provided very little guidance on this issue. There is only one Utah case addressing the enforceability of a force majeure provision. In that case, the court refused to excuse a party’s performance under a force majeure provision because the party “contributed to the delays,” and therefore it cannot be said that the delays were “beyond [its] reasonable control” or that the party “was unable to prevent the problem.”[1]
Courts from other jurisdictions, however, have provided additional guidance that can help businesses as they struggle to better understand the force majeure provisions in their current contracts and to improve those provisions in future contracts. The following are some general principles to consider when drafting or reviewing a force majeure provision:
- Courts generally interpret force majeure provisions narrowly based upon the language in the contract.
Force majeure provisions are typically narrowly construed, and courts will look closely at the specific language of the particular force majeure clause to determine whether the parties intended the type of event in question to excuse performance.[2] For example, the COVID-19 pandemic is much more likely to trigger a force majeure provision that expressly lists “disease,” “pandemic” and/or “epidemic” as a force majeure event than a provision that merely references “events beyond the reasonable control of the parties.” Therefore, companies should carefully tailor the language of their force majeure provisions to their specific circumstances and avoid using boilerplate provisions.
- The purpose of a force majeure provision is to protect a party from events beyond its control.
Force majeure provisions typically excuse a party’s performance obligations when circumstances arise which are beyond the party’s control which prevent the party from performing its contractual obligations. If a party causes or contributes to the event or circumstance that is preventing performance, then a court is not likely to excuse that party’s performance under the force majeure provision.[3]
- The party seeking to apply a force majeure provision generally has the burden of proving its applicability.
Burden of proof is an important issue in any legal proceeding. The party seeking to have its contractual obligation excused typically has the burden of proving that the force majeure provision is applicable, including that the event in question was beyond its control.[4] Therefore, a business impacted by a force majeure event should document the event and the impact the event is having on its ability to perform its contractual obligations.
- Pay careful attention to any notice requirements in the contract.
Many force majeure provisions require the party impacted by the force majeure event to provide timely notice to the other party. For instance, a force majeure provision may include language similar to the following: “Each party agrees to give the other party prompt written notice of the occurrence of any force majeure event, the nature thereof, and the extent to which the affected party will be unable fully to perform its obligations hereunder.” A party’s failure to provide the required notice may forfeit any relief the party was otherwise entitled to under the force majeure provision.[5]
- Force majeure provisions generally do not excuse payment obligations.
Unless the banking system collapses or some other force majeure event occurs that actually prevents a payment from being made, it is unlikely that a customer would be able to successfully rely on a force majeure provision to excuse or delay making a payment under a contract. Generally, force majeure is a remedy that benefits the supplier of goods or services, as they tend to be responsible for most of the performance obligations, rather than customers, whose primary obligation is to make the agreed payments.
In conclusion, the disruption caused by the coronavirus has sparked an increased level of interest in force majeure provisions. Although Utah courts have provided little guidance as to how they will interpret a force majeure provision and whether it will excuse a party’s performance, courts from other jurisdictions have identified certain principles to consider when drafting or reviewing a force majeure provision. The most important thing to remember is that every situation and every contract provision is different so be sure to contact legal counsel to determine how best to proceed.
[1] Deseret Power, LP v. Pub. Serv. Comm’n, 173 P.3d 218, 223 (Utah Ct. App. 2007).
[2] 30 Williston on Contracts § 77:31 (4th ed.); see also Reade v. Stoneybrook Realty, LLC, 882 N.Y.S.2d 8, 9 (N.Y. App. Div. 2009); Maralex Res., Inc. v. Gilbreath, 76 P.3d 626, 636 (N.M. 2003).
[3] 30 Williston on Contracts § 77:31; see also Deseret Power, 173 P.3d at 223.
[4] 30 Williston on Contracts § 77:31; see also Maralex Res., 76 P.3d at 636; Virginia Power Energy Mktg., Inc. v. Apache Corp., 297 S.W.3d 397, 401 (Tex. App. 2009).
[5] State v. Int’l Bus. Mach. Corp., 51 N.E.3d 150, 164-65 (Ind. 2016).
