News and Insights

Visit regularly for up-to-date information on relevant news, firm announcements and additions to our AZ Health Law Blog.

Written By: Steve Lawrence & Miranda Preston

In response to the COVID-19 pandemic, federal, state and local governments and health authorities have issued declarations of emergency, proclamations and orders intended to slow the spread of the virus. Many of these actions have resulted in businesses cancelling or postponing events and closing or limiting business operations indefinitely.  Major events throughout the World have been cancelled or postponed, including the 2020 Summer Olympics, nearly all professional and amateur sporting events in the United States, the Coachella and South by Southwest music festivals, and many others.  As a result, many businesses will be forced to analyze whether they can perform under contracts they signed before the COVID-19 outbreak.  

When unforeseen circumstances arise after a contract is signed, there are certain legal doctrines that may excuse non-performance or delay in performance of a party’s contractual obligations.  These doctrines include the application of contractual force majeure clauses and the related doctrines of impracticability of performance and frustration of purpose.  This article addresses the application of these concepts where a party’s performance is impacted by the COVID-19 pandemic.

What is Force Majeure?  If the parties included a force majeure clause in the contract, certain circumstances may excuse performance under the contract.  Merriam-Webster defines “force majeure” as: “(1) superior or irresistible force; and (2) an event or effect that cannot be reasonably anticipated or controlled.”  In a contract setting, “force majeure” generally refers to a clause that excuses or delays a party’s performance due to unforeseen events outside the control of the parties.  Force majeure provisions are generally found in the boilerplate section of a contract and, prior to the pandemic, were rarely the subject of negotiation among the parties.  Given the sudden halt to the global economy caused by COVID-19, there has been a recent surge of interest in force majeure provisions.

The types of events that may constitute a force majeure event vary significantly from contract to contract.  Some of the more commonly encountered clauses define force majeure events to include natural disasters (such as floods, earthquakes and hurricanes), war, terrorist acts or government action (such as eminent domain or change in laws).  “Acts of God,” are also frequently included as force majeure events, or even a catch-all provision such as “events beyond the reasonable control” of the parties.  The words “epidemic” or “pandemic” are rarely included as force majeure events. 

To Prevail in a Force Majeure Claim.  To claim that an event of force majeure exists, there must be: (1) a force majeure provision in the contract; and (2) the force majeure event (here, the circumstances of COVID-19) must be a cause of the party’s inability to perform.  The ability to delay or excuse performance will depend on the specific terms of the force majeure clause as applied to the facts surrounding the contractual arrangement.  Courts generally do not liberally enforce force majeure clauses.  However, the unprecedented circumstances of COVID-19 appear to be ripe for parties to debate whether contract performance should be excused. 

Type of Force Majeure Clause: Broad or Specific.  The ability to succeed in a force majeure claim may depend on whether the force majeure language in the contract is broad or a specific. Broad force majeure provisions contain general language excusing performance for events that are “beyond the reasonable control of the parties,” and do not specifically reference “pandemics” or an “epidemic.” Under a broad force majeure clause, whether COVID-19 is a “force majeure event” will depend on an interpretation of the provision itself.  Courts will be forced to analyze whether the circumstances of COVID-19 constitute an “Act of God” or an “event beyond the reasonable control of the parties.”  Interestingly, the COVID-19 pandemic includes both a worldwide virus and governmental action in response.  Specific force majeure provisions include a specific list of events, the occurrence of which would excuse or delay party’s performance.  To potentially excuse performance as a result of COVID-19, the clause must specifically include “pandemic” or “epidemic” as a force majeure event.  If pandemics or epidemics are listed as force majeure events, and if the party can demonstrate the COVID-19 pandemic caused their inability to perform, a specific form of force majeure clause is more likely to excuse the party’s performance than a broad, general clause.

Force Majeure Alternatives.  Even if a contract does not contain a force majeure provision, a party’s performance may be excused by the events of the COVID-19 pandemic under the related doctrines of impracticability of performance, frustration of purpose or impossibility.  The doctrine of impracticability of performanceapplies when certain events occurring after a contract is made constitute an impediment to performanceby either party.  The frustration of purpose doctrine deals with the problem that arises when a change in circumstances makes one party’s performancevirtually worthless to the other.[1]  In that case, performance remains possible, but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event.[2]  The doctrine of impossibility of performance applies when performance of the agreement is strictly impossible.  Arizona is among the jurisdictions recognizing a more modern definition of impossibility that includes cases of physical impossibility, as well as cases of extreme impracticability.[3]  Courts analyzing these theories often assess whether the event causing the non-performance was something that could have been anticipated.  Without a force majeure provision in a contract, though, courts may be called upon to apply these doctrines.

Arizona Law.  There are relatively few Arizona cases that interpret either a broad form or specific form of force majeure provision.[4]  The Federal District Court was called upon to interpret a force majeure provision and apply Arizona law in B.F. Goodrich Co. v. Vinyltech Corp., 711 F. Supp. 1513 (D. Ariz. 1989).  Vinyltech entered into an agreement with B.F. Goodrich for the purchase of resin that Vinyltech used to manufacture of PVC pipe.  Subsequently, Vinyltech had an opportunity to buy the resin at a lower price and sought to cancel its prior orders with Goodrich, and be excused from performance the contract.  Vinyltech claimed that the change in market conditions (i.e., the price for the resin) was beyond its control and economically precluded it from continuing to purchase resin from B.F. Goodrich.  The contract contained a force majeure clause that included a list of specific force majeure events, as well as a catch-all force majeure event allowing the parties to be excused from performance and relieved from liability under the contract for “any other cause or causes of any kind or character reasonably beyond the control of the party failing to perform . . . .”

Having not found any Arizona case law directly interpreting a force majeure provision, the Court examined the doctrine of impracticability, which does not typically affect discharge as a result of mere market shifts or financial inability.  As a result, the court concluded that, “Arizona courts would likely find that the force majeure provision does not contemplate or incorporate market shifts or financial inability.”

Interestingly, Vinyltech also argued that the doctrine of frustration of purpose ought to apply to this situation.  Under Arizona law, however, commercial frustration has not been treated as a blanket remedy for parties looking to discharge a contractual obligation on the basis of changes in price or market conditions, stating “Vinyltech cannot now contend for purposes of its commercial frustration argument that a change in prices or market conditions was not a reasonably foreseeable event.”  The Court granted summary judgment in favor of B.F. Goodrich. 

The lesson of the B.F. Goodrich case is that mere change in economics or the market are not likely to be found within a broad form of force majeure provision under Arizona law.  The question remains, however, what if there is a change in the market or the price of goods in a contract that is directly caused by the circumstances of COVID-19?  Courts will be facing this question in the aftermath of the COVID-19 pandemic.

Practical Tips.  Given the current circumstances, either side of any contract may have difficulty performing to the terms of the agreement.  We recommend the following as an action list to consider as you plan your next steps.

  • Review your Current Contracts Closely.  Does your contract have a force majeure provision?  Is the language broad, or does it specifically refer to an epidemic or pandemic?  Does the force majeure clause excuse performance all together, or simply suspend the contract until the force majeure event is over?
  • Procedural Issues.  If you intend to claim that there are force majeure provisions in your agreement that allow you to be excused from performance, are there any applicable notice provisions?  Are there any other procedural measures to consider?  Does the force majeure provision only carve out the time when the event of force majeure applies or does it allow for termination of the agreement all together?
  • If Your Contract Does Not Have a Force Majeure Provision.  If your agreement does not include a force majeure clause (or if it does, but the clause would not apply to excuse a party’s performance as a result of the effects of the COVID-19 pandemic), examine alternate theories of excuse or delay of performance under the doctrines of  frustration of purpose, impossibility, and/or impracticability.
  • Considerations for New Contracts.  Consider whether to include a broad or specific form of force majeure clause in any new contract.  Given the likelihood of continuing or repeat circumstances like the COVID-19 pandemic, consider whether a right of termination would be appropriate if a force majeure event exists, or merely suspension of performance.

If you have any questions regarding your contractual obligations, the business transactions team at Milligan Lawless is here to assist.  Please contact Steve Lawrence at 602-792-3635 or steve@milliganlawless.com, or Miranda Preston at 602-792-3511 or miranda@milliganlawless.com.


[1]  Restatement (Second) of Contracts § 265 cmt. a (1979).

[2]  7200 Scottsdale Rd. Gen. Partners v. Kuhn Farm Mach.,184 Ariz. 341, 345 (Ariz. App. 1995).

[3]  Id.

[4] See A.R.S. § 33-801(6) (providing a definition of “force majeure” for purposes of Arizona law regarding mortgages).

Written By: Kylie E. Mote

The United States Department of Labor’s (DOL) Wage and Hour Division has issued additional guidance on the paid leave provisions of the newly-enacted “Families First Coronavirus Response Act” (FFCRA). The FFCRA, which was signed into law on March 18, 2020, authorizes an emergency relief package intended to support individuals impacted by the COVID-19 (Coronavirus) public health emergency. The support includes temporary paid sick and emergency family leave for eligible employees. The FFCRA takes effect on April 1, 2020.

While the DOL has not yet issued official regulations to help clarify the FFCRA’s paid leave provisions, it has published a series of “Questions and Answers” designed to provide employers and workers with more information about the law’s requirements. Following below are the highlights of the DOL’s most recently-released guidance. For more information about the FFCRA’s paid leave provisions, please refer to our earlier notices:

“Information for Employers on New Coronavirus Relief Law”

“Update on the Families First Coronavirus Response Act: Paid Sick Leave and Emergency Leave Requirements Begin April 1, 2020”

DOCUMENTATION OF NEED TO USE PAID LEAVE:

In initial guidance, the DOL set forth specific types of documentation required to support an employee’s use of paid sick leave for medical purposes. In its most recent guidance, the DOL eliminated its discussion of specific documentation, directing employers instead to applicable IRS forms and instruction (soon to be published). With that said, the DOL continues to indicate that employers may still request appropriate supporting documentation from employees and need not provide paid sick leave if employees do not provide materials sufficient to support a tax credit.

For employees who take paid leave for purposes of caring for their child due to COVID-19 related school closures or childcare unavailability, the DOL notes that employers can require appropriate documentation in support of such leave, just as they would for conventional leave requests under the Family and Medical Leave Act (FMLA).

If employers intend to claim a tax credit under the FFCRA for payment of paid leave, they should retain any supporting documentation provided by employees in their records.

WHAT IS MEANT BY “UNABLE” TO WORK OR TELEWORK

The DOL specifies that being “unable” to work or telework means that an employer has work available, but the employee is unable to perform the work, either under normal circumstances at the regular worksite or by telework, because of a qualifying reason identified by the FFCRA.

The DOL is not entirely clear on who is responsible for deciding whether an employee is able to telework under these circumstances: the employer or the employee. While the DOL does not answer that question directly, it does indicate that the decision should be made jointly between the employer and employee. Specifically, the DOL’s guidance states the following:

If you and your employer agree that you will work your normal number of hours, but outside of your normally scheduled hours (for instance early in the morning or late at night), then you are able to work and leave is not necessary unless a COVID-19 qualifying reason prevents you from working that schedule.”

PAID LEAVE IF UNABLE TO TELEWORK

Employees are eligible for paid leave in the event that they are unable to perform assigned teleworking tasks, or they are unable to work the required teleworking hours, due to a COVID-19 qualifying reason. The DOL reiterates that paid leave is also available to employees who are unable to telework because they are caring for their children due to COVID-19 related school closures or childcare unavailability. To the extent employees are able to telework while caring for their children, however, paid leave is not available.     

TAKING PAID LEAVE INTERMITTENTLY

Provided that employers agree with the arrangement, employees may take paid leave intermittently while teleworking. For example, employers and employees may agree that the employee will telework a portion of the workday and then utilize paid leave for the remainder of the day. Or employers and employees could agree on a schedule under which an employee teleworks three full workdays during the week and takes paid leave for the other two workdays. The DOL encourages employers and employees to collaborate regarding teleworking schedules and to remain flexible in an effort to meet mutual needs.

Provided that employers agree, employees may also take paid leave on an intermittent basis if they are working at their normal worksite, i.e., they are not teleworking, but require paid leave to care for their children due to COVID-19 related school closures or childcare unavailability. The DOL again emphasizes that employers and employees should attempt to be flexible with respect to alternative work schedules.

If employees are continuing to work at their normal worksite and are not taking paid sick leave to care for a child due to COVID-19 related school closures or childcare unavailability, they must take the paid sick leave in full-day increments. Once the employee begins taking paid sick leave, the employee must continue to take paid sick leave each day until the employee either: 1) uses the full amount of paid sick leave available; or 2) no longer has a qualifying reason for taking leave.

NO PAID LEAVE FOR WORK CLOSURES, FURLOUGHS, AND LAYOFFS

Paid leave is not available to any employee in the event that an employer closes its worksite, either temporarily or permanently, because it does not have work for employees or is forced to close under government order. It does not matter whether 1) the closure occurs before or after the FFCRA’s April 1, 2020 effective date; 2) an employee is already on paid leave when the closure occurs (the employee is only entitled to FFCRA paid leave starting April 1, 2020 through the effective date of the worksite closure); 3) an employer furloughs an employee; or 4) the worksite closure is only temporary.

The DOL is clear that paid leave is not available to any employee on furlough, temporary or permanent layoff, or reduced hours due to a lack of work or business.

Employees who are not eligible to receive paid leave as a result of these circumstances may be eligible for unemployment benefits.  

CONTINUING HEALTH COVERAGE

When an employee takes paid leave under the FFCRA, employers must continue the employee’s group health coverage on the same terms as if the employee had continued to work.

FFCRA PAID LEAVE WITH AN EMPLOYER’S EXISTING PAID TIME OFF ALLOWANCE

If employees are eligible to take paid leave under the FFCRA, as well as paid leave that is already provided by their employer (e.g., vacation), the employees have the sole discretion to use the FFCRA paid leave or the existing paid leave provided by their employer. Employers cannot dictate what type of leave their employees use under these circumstances.

Employees may not, however, choose on their own to supplement the pay received when taking FFCRA paid leave with existing paid leave provided by their employer. For example, employees cannot decide unilaterally to use one-third of available vacation days to “top off” any FFCRA paid leave that is provided at only two-thirds of the employee’s regular pay (so as to receive a full day of pay). Employees who wish to “top off” FFCRA paid leave with existing paid leave must obtain their employer’s consent (note, however, that employers cannot require employees to supplement). 

The DOL makes clear that employers cannot claim or receive tax credit for any supplemented paid leave.  

SMALL BUSINESS EXEMPTION

In its most recently-released guidance, the DOL clarifies that small employers with fewer than 50 employees may be exempted from the FFCRA’s paid leave requirements if their authorized officer determines one of the following applies:

  • Providing paid leave relating to school closures/childcare unavailability would cause the business’s expenses and financial obligations to exceed its revenues and cause the business to cease operating at a minimal capacity; 
  • The employee’s absence for school closure/childcare unavailability reasons would entail a substantial risk to the business’s financial health or operational capabilities because of specialized skills, knowledge of the business, or responsibilities the employee possesses; or 
  • There are insufficient workers who are able, willing, and qualified to perform the labor or services provided by the employee requesting school closure/childcare unavailability leave, and these labor or services are needed for the business to operate at a minimal capacity.

The DOL is clear that the small business exemption is only available with respect to employees requesting FFCRA paid leave for school closure/childcare unavailability. Small employers are not exempt from providing FFCRA paid sick leave to employees for reasons unrelated to school closure/childcare unavailability.

HEALTHCARE PROVIDER AND EMERGENCY RESPONDERS

Employers of healthcare providers and emergency responders are permitted to exclude those employees from FFCRA paid leave benefits. In its most recent guidance, the DOL has broadly defined “healthcare provider” to include “anyone employed at any doctor’s office, hospital, health care center, clinic, post-secondary educational institution offering health care instruction, medical school, local health department or agency, nursing facility, retirement facility, nursing home, home health care provider, any facility that performs laboratory or medical testing, pharmacy, or any similar institution, employer, or entity. This includes any permanent or temporary institution, facility, location, or site where medical services are provided that are similar to such institutions.” 

The definition of “healthcare provider” also includes any individual employed by an entity that contracts with any of the above institutions, employers, or entities to provide services or to maintain the operation of the facility. This also includes anyone employed by any entity that provides medical services, produces medical products, or is otherwise involved in the making of COVID-19 related medical equipment, tests, drugs, vaccines, diagnostic vehicles, or treatments. This further includes any individual that the highest official of a state or territory, including the District of Columbia, determines is a health care provider necessary for that state’s or territory’s or the District of Columbia’s response to COVID-19.

The DOL also takes a broad stance on which employees constitute emergency responders under the FFCRA. An “emergency responder” is defined as an employee who is “necessary for the provision of transport, care, health care, comfort, and nutrition of such patients, or whose services are otherwise needed to limit the spread of COVID-19.” The DOL guidance extends the exemption to, among others, law enforcement officers, correctional institution personnel, fire fighters, EMS personnel, physicians, nurses, public health personnel, paramedics, EMT, 911 operators, and public works personnel.

PAID LEAVE ABSENCES COUNT TOWARD WAITING PERIOD FOR HEALTH COVERAGE

The DOL states that eligibility requirements for employer-provided health coverage, including a waiting period, apply in the same way as if the employee continued to work, including days spent on paid leave.

TOTAL FMLA LEAVE AVAILABLE

The DOL clarifies that the FFCRA’s emergency family leave provisions do not change the overall amount of FMLA leave available to employees during an applicable FMLA 12-month period.

For example, if an employee takes some, but not all, of the 12 weeks of emergency family leave provided by the FFCRA, he or she is still eligible to take the remaining portion of conventional FMLA leave (for a qualifying reason, e.g., a serious health condition) so long as the total time taken does not exceed 12 workweeks in the 12-month period. On the other hand, if an employee uses all 12 weeks of emergency family leave provided by the FFCRA, he or she will not be eligible to take any additional conventional FMLA leave during the same 12-month period.

30 DAYS TO COMPLY IN GOOD FAITH

The DOL will observe a temporary period of non-enforcement for the first 30 days after the FFCRA’s April 1, 2020 effective date, so long as the employer has acted reasonably and in good faith to comply with the FFCRA.  For purposes of this non-enforcement position, “good faith” exists when violations are remedied and the employee is made whole as soon as practicable by the employer, the violations were not willful, and the DOL receives a written commitment from the employer to comply with the FFCRA in the future.

The attorneys at Milligan Lawless will continue to update employers on various workplace issues arising from the rapidly-developing COVID-19 public health emergency.

If you have any questions regarding how the FFCRA’s paid sick leave or emergency leave requirements affect your workplace, please contact John Conley at (602) 792-3535 or Kylie Mote at (602) 792-3523.