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Does the COVID-19 Pandemic Excuse a Breach of Contract?

By Emilee Gehling and Isabella Erickson

For over two years, the COVID-19 Pandemic has affected every part of American life. Lockdowns, quarantine, and public health guidelines have complicated life, including conducting business. Businesses have had to close, change, and adapt to the COVID-19 Pandemic. Disruptions in the supply chain have made it difficult for many businesses to obtain the products and materials needed to meet their obligations and turn a profit. With so many challenges, when are you excused from a contract?

A force majeure clause may excuse your performance. Force majeure clauses apply when a party is unable to perform due to a force beyond its control. Sometimes, force majeure is also called an “Act of God.” The event must be unpredictable and outside of a control. For example, if a hurricane were to strike Iowa tomorrow and destroy your place of business, that would likely count as a force majeure. No one would expect a hurricane to hit Iowa, and no one can prevent it. On the flipside, a tornado that damages your Iowa business may not trigger the force majeure clause and release you from your obligations: Iowans expect tornados, and a court would expect you to have prepared for such a risk.

Due to COVID-19, some business owners have attempted to use force majeure clauses to excuse their performance. Courts have generally accepted the COVID-19 pandemic as unpredictable. Whether or not a force majeure clause excuses performance due to the pandemic depends on how broad the force majeure clause is, and who bears the risk. For example, if you ran a restaurant during the height of the pandemic and government restrictions completely prevented indoor dining, a force majeure clause in a rental agreement that includes government restrictions would excuse you from performance. This is what happened in 55 Oak St. LLC v. RDR Enters., a Maryland Supreme Court case. However, as demonstrated in this case, the force majeure clause would only protect you in the case of a complete government restriction, not a partial restriction.

COVID-19 is here to stay. Potential spikes in cases leave businesses at risk of another government lockdown, even if it is unlikely. Courts do not like to apply force majeure clauses unless it is clear that the parties really intended to include an event, like a pandemic. When signing a contract, always pay close attention to how the contract controls in unpredictable situations. A force majeure clause will not be interpreted broadly, so you must plan ahead.

Contact Gehling Osborn Law Firm, PLC for all of your business planning needs.

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