FORCE MAJEURE PROVISIONS AND OTHER REMEDIES IN THE AGE OF COVID-19
April 16, 2020
Businesses nationwide have experienced hardship and interruption caused by the coronavirus disease of 2019 (“COVID-19”). In light of these trying circumstances, businesses are trying to determine their obligations under existing contracts and whether they may be temporarily or permanently excused from performance. Below we have outlined possible avenues for excusing performance, including force majeure provisions in contracts and the common law doctrines of impossibility, impracticability and frustration of purpose.
Force Majeure Provisions
A force majeure provision gives the invoking party the contractual right to suspend certain obligations to perform under a contract. Accordingly, the relevant contract must have a force majeure provision. There is no right to excuse performance for force majeure at common law. The types of performance commonly excused under force majeure provisions are non-payment obligations, thus sellers tend to be the main beneficiaries of these provisions as they typically do not excuse payment obligations. For example, force majeure provisions in commercial leases typically do not excuse the payment of rent by tenants.
Interpreting force majeure provisions requires a close reading of the contractual language and the potential application of that provision is a fact-intensive question. For a force majeure provision to be successfully invoked, three factors need to be considered: (1) whether the event falls under one of the listed force majeure events in the contract; (2) whether the event was unforeseeable and could not be mitigated; and (3) whether performance is impossible or impracticable depending on the jurisdiction. Force majeure law is a creature of state law, and it is important to note that there can be considerable variance between states in their courts’ interpretation of force majeure provisions. These differences in state law can be decisive in the outcome. Therefore, it is important to consider the relevant contract’s force majeure provision in light of the contract’s governing law.
Force majeure provisions enumerate events that could possibly excuse performance, which range from “acts of Gods” to “war” to “labor strikes.” What events to include is a matter of negotiation between the parties. In the context of COVID-19, the ideal clause would include “pandemic,” “epidemic” or “quarantine” as a listed force majeure event. Short of that, there are two other possible events that could be used to excuse performance: “acts of God” and “governmental action.”
An “act of God” is typically defined and understood to be limited to overwhelming and unpreventable events caused exclusively by natural forces, such as an earthquake, flood, tornado or another type of natural disaster. Courts have traditionally narrowly construed this term and, while possible, it is unclear that courts would interpret the COVID-19 pandemic as falling within its purview. It is worth noting that, in an 1857 case, the Maine Supreme Judicial Court interpreted a localized outbreak of cholera as an “act of God,” which excused performance under a labor contract.1 Thus, it is possible that Maine courts could take a more expansive approach to interpreting “acts of God.”
Another potential avenue is relying on the inclusion of “governmental action.” Mandatory closures and other measures promulgated by federal, state or local governments in connection with COVID-19 may excuse performance. In this particular case, it is the governmental action or order itself, not the pandemic, that would lead to excused performance.
Some force majeure provisions may also have catch-all language to include acts beyond the reasonable control of the parties. Depending on whether the interpretation of the catch-all is construed narrowly or broadly, that catch-all will either include only events similar to those specifically enumerated or be broadly interpreted to include all events outside the parties’ control. Changes in economic circumstances alone will not be sufficient to excuse performance.
Certain jurisdictions will require that, in addition to the contractual language, the event giving rise to force majeure event was unforeseeable and could not be mitigated. For example, consider a supply contract. In such a scenario, the question of whether there has been a force majeure event will turn on whether the supplier, assuming that is putative impacted party, could have foreseen and mitigated the disruption by, for instance, seeking alternative sources of supply of the goods sold or found alternative avenues to provide its services. Events that were foreseeable or capable of mitigation may prevent events from rising to the level of a force majeure event.
Additionally, certain jurisdictions will require either that the force majeure event make the performance of the impacted party impossible or impracticable. For states that require impossibility, performance must have been rendered objectively impossible. Simply because the economics of performance have become more onerous will not excuse a party in such a context. Impracticability imposes a less stringent standard where the burden on the impacted party becomes so great as to make performance excessively onerous and undermines the commercial logic of the contract.
The precise contours of the force majeure analysis will depend, most importantly, on the contractual language of the provision itself with the governing law of the contract determining how the language of that force majeure provision is interpreted. With the severity and unprecedented nature of the COVID-19 pandemic, the accompanying governmental action and the resultant shock to the economy, it possible that courts may feel compelled to take a more liberal approach to interpreting force majeure provisions than they previously have.
Impossibility, Impracticability and Frustration of Purpose
There other avenues available if the contract in question does not have a force majeure provision. In such a case, there may be recourse to common law doctrines, such as impossibility or impracticability, depending on the jurisdiction, and frustration of purpose.
Impossibility or impracticability, as relevant, typically requires (1) an unexpected intervening event to have occurred, (2) the agreement between the parties assumed such an event would not occur and (3) such an event made performance impossible or impracticable, as applicable. The event that occurs, in most cases, must destroy the underlying basis of the bargain. This means that the very logic of the contract assumed the non-occurrence of the event. For example, in the scenario where Party X contracted Party Y to repair Party X’s boat and that boat sank the day before repairs were to be made, that would be grounds for rescission of the contract on the basis of impossibility as the entire commercial object of such a contract has been rendered impossible.
Frustration of purpose is similar to impossibility though it requires (1) that the frustrated purpose must have been the principal purpose of the impacted party under the agreement without the fault of the impacted party, (2) the non-occurrence of the event was a basic assumption of the contract when it was made and (3) the frustration was substantial. Unlike impossibility, performance is still theoretically possible but the basis of the bargain has been fundamentally altered by the event in question. For example, if Party X hired a hotel room and it was understood with Hotel Y it was for the purpose of viewing a parade from the balcony of that room and the parade was cancelled, Party X would be able to rescind the hire of the hotel room because the basis of the bargain was substantially frustrated. Note in this example that performance is not impossible but rescission of the contract is still available because Party X’s principal purpose was frustrated through no fault of Party X.
As with force majeure provisions, it should be noted again that the elements of each of these doctrines and their interpretation will vary state to state in such a way that could be outcome determinative. If the scenario in question pertains to the sale of goods, the Uniform Commercial Code of the relevant state should be consulted for guidance regarding impossibility and impracticability.
As any business evaluates its contracts and its ability to perform thereunder, the contractual language of any force majeure provision, the governing law of the contract and the real life circumstances surrounding the business and its ability to perform that contract are of paramount importance. These elements will dictate whether that business is able to avail itself of the remedies discussed above.
As always, you should feel free to contact us if we can assist in any way.