The Impact of COVID 19 on Small Businesses and the Force Majeure (Act of God) Clause

During these times of uncertainty in the business sector, issues pertaining to contractual obligations are arising.  With many companies being forced to reduce or completely shut down business due to governmental limitations, businesses across the country are concerned about meeting and keeping their existing contracts.  Force Majeure provisions and the Act of God clause are used in many contracts to consider the possibility of unexpected circumstances. Normally a Force Majeure clause is triggered when the occurrence of an unexpected event, also known as an Act of God, inhibits completion of the contract so it is excused.  In many states across the country, the Act of God clause is enabled to excuse or delay contracts due to natural disasters, pandemics, or any event that inhibits contractual obligations from being met due to factors beyond the party’s control.

The phrase “Act of God” is arguable due to the many interpretations of it.  In relation to the COVID-19 outbreak, the virus may not have been man-made, but the spread of the virus and the resulting global spread of the virus is man-made and, therefore, may not be seen as an act of God in the traditional sense.  However, in California, the test to determine if an event is an act of God is dependent upon if there was “an insuperable interference… as could not have been prevented by the exercise of due diligence.” Pac. Vegetable Oil Corp. v. C.S.T., Ltd. (Cal. 1946) 29 Cal.2d 238.  In addition, the California Civil Code section 1511 states that a contractual obligation is excused when it is prevented or delayed by “an irresistible, superhuman cause, or by the act of public enemies of the state or of the United States, unless the parties have expressly agreed to the contrary.”

Although there is code prepared for situations similar to the COVID-19 outbreak, some contracts may not include consideration for a pandemic situation.  In some cases where the parties’ written contract states an intent to plan for unforeseen scenarios, those terms will generally control and be enforced by the courts.  Specific language is necessary to enforce the act of God clause within a contract.  In addition, when there is no contract language or Force Majeure provision, contract law in California still recognizes and accommodates situations where contractual performance is made impossible due to unforeseeable circumstances; as stated, “an unwritten event can still fit within the act of God provision if it is unforeseeable at the time of contracting.” Autry v Republic Productions (1947) 30 Cal.2d 144.

Not being able to work during times of government mandated shut down does not by itself excuse the obligation to the contract.  A party to the contract who knows it will not be able to perform an obligation, has the right to bring an action for declaratory relief first.  Furthermore, the filing party holds the responsibility to frame the issues for the judge.  The party bearing the burden must prove that there has been “extreme and unreasonable difficulty, expense, injury, or loss involved.” Metzler v. Thye (1912) 163 Cal. 95, 98.  Companies must also prove that they made sufficient or reasonable efforts to avoid consequences of the force majeure event. Butler v. Nepple (1960) 54 Cal.2d 589. 599.

In the coming months, the court system will begin processing and hearing contract disputes that developed during the COVID-19 shutdowns.  In California, the laws may be more favorable when extending consideration for Force Majeure, as California Civil Code section 3526 states, “no (wo)man is responsible for that which no (wo)man can control.”

If your business is being impacted by the COVID 19 pandemic and the resultant shelter-in-place directives, and you want to discuss options please give us a call at 925-574-0100.  Although we are working from home, we are regularly receiving phone messages and promptly returning phone calls. We offer free 15-minute phone consultations.

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