COVID-19: Force Majeure
CORONAVIRUS: FORCE MAJEURE AND OTHER CONTRACT PERFORMANCE DEFENSES – WHAT HAPPENS NOW?
By: Christine Barker & Mike McGoldrick
April 3, 2020
To curtail the spread of Coronavirus (“COVID-19”), states and cities across the United States are enacting orders to shelter-in-place, to work remotely and in some cases temporarily closing nonessential businesses. These orders have directly impacted many businesses and their abilities to perform, and receive performance under, critical and material contracts. Who will bear the burden of this nonperformance in those business relationships? Businesses need to review their existing contracts to determine whether they are obligated to perform under each contract, or whether they can invoke a force majeure clause or other defenses to excuse performance temporarily or possibly permanently. Where such contractual defenses are not available, consideration should be given to what other proactive steps can be undertaken now to minimize exposure and preserve critical business relationships.
THE FORCE MAJEURE DEFENSE
Force majeure is a contractual provision that relieves a party from its contractual obligations when its performance has been prevented by a force beyond its control that was not foreseeable and makes performance of the contract impractical or impossible.[i]
Typical force majeure events listed in contracts include:
- Acts of God, such as severe acts of nature or weather including earthquakes, floods, fire, or hurricanes;
- War, acts of terrorism, nuclear emergency, blockade, embargo, riots and epidemics;
- Acts of governmental authorities in changing laws or restrictions or restraints imposed by law; and
- Strikes and labor disputes.[ii]
In reviewing a force majeure contract clause, courts will undertake a fact intensive inquiry that is focused upon the language of the contract and the specific circumstances disrupting or preventing performance between the parties. The principle of interpretation applicable to such clauses is that the general words are not to be given expansive meaning, they are normally confined to things of the same nature as the particular matters mentioned.[iii] A party’s performance will only be excused when either the subject matter of the contract is destroyed or the means of performance is blocked, in each case resulting in performance being objectively impossible. The impossibility must be produced by an unanticipated event that could not be foreseen or guarded against in the contract.[iv]
As such, contractual force majeure clauses or similar clauses excusing nonperformance due to circumstance beyond the control of the parties will typically be given a strict interpretation and thus provide only a narrow defense.[v] If the force majeure event clause specifically includes the particular event that prevents a party’s performance the likelihood is that the party will be excused.[vi] But if it does not, the courts will reach to create a defense that is not explicit.
On March 11, 2020, the World Health Organization (“WHO”) declared Coronavirus a pandemic, which the WHO generally defines as a disease that has become widespread around the world with an impact on society. WHO defines epidemic as the occurrence in a community or region of cases of an illness clearly in excess of normal expectancy. If a contract in dispute lists epidemics or pandemics as a force majeure event, the party looking to be excused from performance would argue that the Coronavirus qualifies given that the WHO has declared it a pandemic.
If your force majeure clause does not list epidemic or pandemic as a specific force majeure event, it is possible that COVID-19 may still excuse contract performance if the force majeure clause contains a provision concerning unanticipated governmental action. Connecticut and numerous other states have imposed government restrictions on the ability of businesses to function due to COVID-19 and in some cases the states have closed or severely limited the ability of retail businesses to operate in order to limit the spread of COVID-19. For any contract executed prior to the outbreak of COVID-19 and the publicity from it, a party looking to invoke a force majeure clause could make a strong argument that such government action was unanticipated and could not be foreseen or guarded against in the contract.
OTHER POSSIBLE DEFENSES: IMPOSSIBILITY/IMPRACTICALITY AND FRUSTRATION OF PURPOSE
In those situations where a contract does not contain a force majeure clause or the force majeure clause does not excuse performance due to the COVID-19 pandemic, other legal options may be available to excuse a party’s performance such as the defenses of impossibility, impracticality and frustration of purpose.
“A thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost.”[vii] Connecticut courts have identified four factors that a party must demonstrate for the doctrine of impossibility/impracticality to be applicable. A party claiming that a supervening event or contingency has prevented and thus, excused a promised performance must demonstrate that: (1) the event made the performance impracticable; (2) the nonoccurrence of the event was a basic assumption on which the contract was made; (3) the impracticability resulted without the fault of the party seeking to be excused; and (4) the party has not assumed a greater obligation than the law imposes.”[viii] Only in the most exceptional circumstances have courts concluded that a duty is discharged because additional financial burdens make performance less practical than initially contemplated.
The doctrine of frustration of purpose excuses a party in certain situations where the objectives of the contract have been utterly defeated by circumstances arising after the formation of the agreement. Excuse is allowed under this rule even though there is no impediment to actual performance.[ix] Under the doctrine of frustration of purpose as under the impracticability doctrine, the event upon which the party relies to excuse performance cannot be an event that the parties foresaw at the time of contact.[x]
Based on the fact that numerous states, including Connecticut, New York, New Jersey, Massachusetts and Rhode Island, have declared states of emergency due to COVID-19 and implemented restrictions closing certain businesses and curtailing the operations of others, businesses may wish to argue that performance under their contracts was made impossible, impracticable or the purpose of the contact was been defeated due to COVID 19.
OTHER PROVISIONS: CAN YOU OTHERWISE PREVENT OR MITIGATE EXPOSURE
Many businesses are having a difficult time meeting their contractual obligations due to COVID-19. Whether a business can successfully invoke a force majeure clause or take advantage of an impossibility/impracticability defense or a frustration of purpose defense as noted above, depends upon a fact intensive inquiry, the specific language of the contract and applicable law. However, there may also be other provisions in your contracts that directly impact the scope and extent of exposures or that limit the enforcement of such provisions even if in place. Some of these provisions may be time sensitive where failure to act can significantly diminish a defense or expand an exposure. Contracts should be reviewed for notice provisions, termination provisions, mitigation provisions and the like with an emphasis on what steps, if any, and what opportunities exist to reduce loss and exposure.
Finally, while we are in the midst of this crisis, communications with key vendors and suppliers can be critical. Careful consideration should be given to the scope and content of those communications. Strategies should be well thought out and where opportunity permits, practical concessions invited and resolutions implemented and documented in signed writings. When this crisis diminishes, and the business world takes its step back to truly assesses the damage, these negotiated resolutions may be less available and the opportunities to preserve business relationship more competitive.
If you are having trouble in meeting any of your contractual obligations in these very uncertain times or have parties to your contracts struggling with performance, please contact us so we can properly review these contracts for you. It is essential to look these agreements to understand both the risks presented and to take steps where available to minimize exposure.
[i] Aukema v. Chesapeake Appalachia, LLC, 904 F. Supp. 2d 199 (N.D.N.Y 2012; Rand Whitney Containerboard L.P. v. Town of Montville, 2005 U.S. Dist. LEXIS 22796, (D. Conn. Aug. 31, 2005).
[ii] Rand Whitney Containerboard L.P. v. Town of Montville, 2005 U.S. Dist. LEXIS 22796, (D. Conn. Aug. 31, 2005). Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 902 (1987).
[iii] Kel Kim Corp. v. Cent. Markets, 70 N.Y.2d at 902; 18 Williston Contracts § 1968, at 209 (3d ed 1978).
[iv] Kel Kim Corp. v. Cent. Markets, 70 N.Y.2d at 902.
[v] Id.; URI Cogeneration Partners L.P. v. Board of Governors for Higher Education., 915 F. Supp. 1267 (D.R.I. 1996).
[vi] Id.
[vii] Translantic Financing Corp. v. United States, 363 F.2d 312, 315 (D.C. Cir. 1966); See also Hess v. Dumouchel Paper Co., 154 Conn. 343, 349-52 (1966). Roy v. Stephen Pontiac-Cadillac, Inc., 15 Conn. App. 101, 103-104 (1988).
[viii] O’Hara v. State, 218 Conn. 628, 637 (1991); Dills v. Town of Enfield, 210 Conn. 705, 717 (1989).
[ix] Hess v. Dumouchel Paper Co., 154 Conn. at 350-351.
[x] O’Hare v. State at 638.