As a business owner you enter into many contracts. You enter into contracts with vendors for supplies, merchandise, equipment, goods, services and venues. You enter into contracts with landlords, commercial management companies, cleaning and maintenance companies. You enter into contracts with employees, independent contractors and professional services firms. Something that is probably common to all of these contracts is a force majeure clause. A force majeure clause generally provides that if an extraordinary event beyond a company’s control occurs, that company’s performance under the contract may be suspended or excused. A typical list of force majeure events include war, riots, fire, flood, hurricane, typhoon, earthquake, lightning, explosion, strikes, lockouts, slowdowns, prolonged shortage of energy supplies, and acts of state or governmental action prohibiting or impeding any party from performing its respective obligations under the contract. So if, for example, a hurricane occurred that shut down a port, the seller planning to ship its goods through that port would not be liable for late delivery of the goods. So the questions is does a viral pandemic fall into the category of a force majeure event?
If the language of the clause does not specifically include or exclude viral pandemics, whether such an occurrence is considered an Act of God is uncertain. In addition, some clauses include acts by governmental authorities, such as declaring a state of emergency. Again, whether the effects of the state of emergency caused by a viral pandemic would be considered a force majeure event depends on the specific language of the clause.
Very few force majeure clauses are worded alike. This is because both parties are attempting (or should be) attempting to word the clauses to be as beneficial as possible, within the confines of the appropriate legal limitations, to them and their business.
By way of example, below are two sample force majeure clauses.
Example 1: In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes.
Example 2: Each Party shall be excused from the performance of its obligations under this Agreement to the extent that such performance is prevented by force majeure (defined below) and the nonperforming Party promptly provides notice of such prevention to the other Party. Such excuse shall be continued so long as the condition constituting force majeure continues. The Party affected by such force majeure also shall notify the other Party of the anticipated duration of such force majeure, any actions being taken to avoid or minimize its effect after such occurrence, and shall take reasonable efforts to remove the condition constituting such force majeure. For purposes of this Agreement, “force majeure” shall include conditions beyond the control of the Parties, including an act of God, acts of terrorism, voluntary or involuntary compliance with any regulation, law or order of any government, war, acts of war (whether war be declared or not), labor strike or lock-out, civil commotion, epidemic, failure or default of public utilities or common carriers, destruction of production facilities or materials by fire, earthquake, storm or like catastrophe. The payment of invoices due and owing hereunder shall in no event be delayed by the payer because of a force majeure affecting the payer.
The examples are worded very differently, require the parties to take different actions and have different “remedies” as a result of the occurrence. In the second example the clause specifically identifies epidemic, while the first only lists “an Act of God” which a court would have to define and determine if a viral pandemic would be included. In addition, in the second there is a requirement for the party claiming the excuse to put the other party on notice.
Maryland courts follow the objective law of contracts. As stated in General Motors Acceptance Corp. v. Daniels,303 Md. 254, 261-62 (1985):
“A court construing an agreement under this test must first determine from the language of the agreement itself what a reasonable person in the position of the parties would have meant at the time it was effectuated. In addition, when the language of the contract is plain and unambiguous there is no room for construction, and a court must presume that the parties meant what they expressed. In these circumstances, the true test of what is meant is not what the parties to the contract intended it to mean, but what a reasonable person in the position of the parties would have thought it meant. Consequently, the clear and unambiguous language of an agreement will not give away to what the parties thought that the agreement meant or intended it to mean. As a result when the contractual language is clear and unambiguous, and in the absence of fraud, duress, or mistake, parol evidence is not admissible to show the intention of the parties or to vary, alter, or contradict the terms of that contract.” (Citations omitted.)
Generally this means the court will look to the contract language, applying the customary, ordinary and accepted meaning of the language. Atlantic Contracting and Material Co., Inc. v. Ulico Cos. Co., 380 Md. 285, 301 (2004). If there is an ambiguity in the contract language, the court will consider extrinsic evidence, which is evidence that relates to the contract but not in the document itself. Heat & Power Corp. v. Air Prods. & Chems., Inc.. 320 Md. 584, 596-97 (1990).
In light of recent events, business owners will inevitably be facing many situations where they will be unable to perform what they had agreed to under a contract or will have vendors and providers who are no longer able to perform. In those situations, it is important to have an experienced attorney review the specific contract language to determine your options. In many situations the parties may be able to work together to reach a mutually agreeable resolution. In some situations, however, the parties will not be able to do so and legal action will need to be taken. PK Law’s Corporate and Real Estate Attorneys can help. You can reach them by phone or email which can be found on their bios. You can also contact information@pklaw.com for assistance.
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