As a result of the grave conditions faced by businesses due to COVID-19, parties to a contract may look to the contract to determine whether a delay or failure to perform is warranted under the circumstances. Specifically, the parties will look to a force majeure provision. A force majeure clause is defined as “a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.” Black’s Law Dictionary, 718 (9th ed. 2009). While force majeure clauses may have been seen as boilerplate language prior to the COVID-19 outbreak, they are more important now than ever.
Force Majeure Under Alabama Law
The first step in addressing a force majeure issue under Alabama law is to analyze the actual language in the contract to determine whether a force majeure event has triggered the defense set forth in the provision. The defenses may differ; a provision may allow for only the suspension of performance, only the excuse of performance, or a hybrid of both. If the contract contains a force majeure clause, one must look to the items specifically addressed as force majeure events. It is not typical for these contracts to specifically address items such as “epidemics, pandemics, or quarantines”; however, if they do, the terms of the contract would control. It is more likely that the provision will list an event such as an “act of a government authority”; as a result of the governmental mandates stemming from COVID-19, that is what a party will seek to argue as a defense to suspend or excuse performance. In addition, the provision may suspend or excuse performance as a result of an “act of God” or include a catchall defense for “any other cause beyond the reasonable control of the party” which a party may look to claim as a defense in light of the COVID-19 outbreak. Typically, a court will interpret catchall phrases narrowly by looking at items specifically addressed in the preceding language, and the court will look to the intentions of the parties.
What Is an Act of God Under Alabama Law?
Interpretations of “act of God” vary state by state, with Alabama’s definition skewing slightly more liberally than those of other states. Alabama has held that a party should not be liable for an act of God when that event could not have been reasonably anticipated. Alabama law further describes an act of God as an accident produced by physical causes that are irresistible and occur only when there exists such an extraordinary intervention that no human means could resist it. For the “act of God” defense to apply, the party must show that the injury was due directly and exclusively to natural causes without human intervention and that it could not have been prevented by exercise of reasonable care and foresight.
Whether COVID-19 will be considered an act of God under Alabama law — due to the human factors in the transmission of the virus and the governmental mandates requiring certain closures and limitation of operations that may contribute to delay or failure in performance — will be an issue for courts to decide for years to come.
Standard of Performance
If the result of the analysis under the force majeure provision is that a force majeure event has been triggered, the next step in the analysis is to determine what “standard of performance” the force majeure clause excuses. Some contracts may specifically address an impossibility standard, where the performance of the obligation must be impossible in order to be excused, whereas some contracts do not go so far and use only the standard of “commercial impracticability.” A court will not read a standard of performance into the contract, so it is important to examine each individual contract.
The last step in claiming a force majeure defense is that the party asserting the defense typically must give timely notice to the other party in the manner contemplated within the contract. The party’s failure to give timely notice in the form prescribed may result in the waiver of any ability to obtain relief for nonperformance or delayed performance.
What if the Contract Does Not Contain a Force Majeure Provision?
If the risk of loss has not been contracted for through a force majeure provision, there is a common law defense set forth in the Restatement (Second) of Contracts §261. It states that if performance of a contractual obligation is impossible or impracticable, the obligation is discharged absent contractual language to the contrary. However, the Alabama Supreme Court has held this not to be the law within its state because where a party has undertaken an obligation, the party is required to perform within the terms of the contract or answer in damages, despite an act of God, unexpected difficulty, or hardship, since these contingencies could have been provided against by the contract.
An exception to the holding stated above is that Alabama does recognize an excuse for nonperformance under a contract if performance becomes impossible through a change in the law or a government action.
Another exception has been codified under Alabama Commercial Code §7-2-615(a), which excuses performance when the performance is commercially impracticable as a result of unforeseen circumstances that were not contemplated by the parties at the time of contracting. If the contract falls under the Alabama Commercial Code, has no force majeure clause, and is silent as to the risk of nonperformance, a delay in delivery — or nondelivery — of goods is not found to be a breach if delivery of the goods has been “made impracticable by the occurrence of a contingency the nonoccurrence 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.” Alabama Commercial Code §7-2-615(a).