Excusing Contractual Performance due to the COVID-19 Crisis?
Updated: May 4, 2020
The COVID-19 pandemic and the havoc wreaked by it has sparked a flurry of lawyerly commentary on whether the crisis could be used to excuse contractual obligations. This is the first in a series of posts addressing pandemic-related contract issues. Today’s topic is Force Majeure Clauses.
The first thing you want to do is read your contract to see whether it contains a force majeure clause. If so, what events are included? Courts will interpret the provision in accordance with the intent of the parties just like they do other contractual clauses. If "national epidemic", "pandemic", or "virus-related government shut-down" is expressly mentioned as an excusing event, then just skip to the end of this post. But in most contracts, the force majeure is less helpful and looks something like this:
“Any delay or failure of either party to perform its obligations under this Agreement shall be excused if, and to the extent that the delay or failure is caused or materially contributed to by force majeure or other acts or events beyond the reasonable control of a party hereto.”
The above is an example of a general or “catch-all” force majeure provision. Force majeure refers to “acts of God” meaning acts of nature that were out of the control of the contracting parties, such as floods, earthquakes, and other natural disasters. Presumably an “act of God” is not foreseeable (although with advancements in technology these days, that’s debatable).
A force majeure clause refers to a provision in your contract that carves out situations where a party’s performance might be affected because of a "force majeure" meaning an event that occurred that was out of the control of the parties. Ultimately, the courts will defer to the intent of the parties to define the contours of any force majeure provision.[i]
Generally, “catch-all” force majeure clauses, such as the above, that merely reference “other acts or events beyond the reasonable control of a party” are narrowly construed meaning courts will interpret them to excuse performance only when there are natural disasters and other events that are unforeseeable.[ii] Why unforeseeable? Because if the event was foreseeable, then one of the party’s could have “reasonably” controlled it, or at least controlled the impact of its consequences.
As with all things contracts, the devil is in the drafting details. Sometimes, the force majeure provision is drafted so that it specifically enumerates situations that qualify as events that excuse performance. Here is an example:
“Either Seller or Buyer will be excused from the obligations of this Contract to the extent that performance is delayed or prevented by any circumstances (except financial) reasonably beyond its control or by fire, explosion, mechanical breakdown, strikes or other labor trouble, plant shutdown, unavailability of raw materials or unavailability of or interference with the usual means of transporting the Product or compliance with any law, regulation, order, recommendation, or request of any governmental authority.”[iii]
In the above clause, the enumerated events (fire, explosion, mechanical breakdown, strikes, etc) is preceded by the disjunctive “or,” meaning that these events do not need to be reasonably beyond the control of the party.[iv]Accordingly, the court found that the party’s performance was excused by an explosion regardless of whether the explosion was beyond the reasonable control of the party. The reality is that force majeure clauses are too often treated like other boilerplate clauses, meaning that an attorney may have simply cut and pasted them into the document without really “intending” anything. Unfortunately, minor changes in wording could lead to significant differences in outcomes. For example, compare these two clauses:
In the event either Party shall be delayed or hindered or prevented from the performance of any obligation required under this Agreement by reason of strikes, lockouts, inability to procure labor or materials, failure of power, fire or other casualty, acts of God, restrictive governmental laws or regulations, riots, insurrection, war or any other reason not within the reasonable control of either party as the case may be, then the performance of such obligation shall be excused for the period of such delay and the period for the performance of any such act shall be extended for a period equivalent to the period of such delay.[v]
If either party to this Lease shall be delayed or prevented from the performance of any obligation through no fault of their own by reason of labor disputes, inability to procure materials, failure of utility service, restrictive governmental laws or regulations, riots, insurrection, war, adverse weather, Acts of God, or other similar causes beyond the control of such party, the performance of such obligation shall be excused for the period of the delay.[vi]
In Clause Two, the parties had included the catchall phrase “or other similar causes beyond the control of such party.” The court found that the event was of a different kind and nature than that listed in the provision. By contrast, Clause One does not contain that limiting clause so the court in that case held that it applies to “any other reason” that is beyond the reasonable control of the parties. In other words an event that excuses non-performance did not have to be similar to the specified causes that were listed in the first clause but it did in the second clause.
So, it's important to first read your force majeure clause. See if it mentions non-performance triggering events that would apply to this crisis. In this case, it might be “epidemic,” “health crisis,” “pandemic,” or “governmental order.” (This last is particularly important in states where “non-essential” businesses are ordering that everyone work from home, such as California and New York). If it doesn’t expressly reference an event that describes this crisis, it may still constitute a triggering event if the clause is a generic force majeure clause.
Although subject to interpretation, my personal opinion is that the scale and suddenness of the virus outbreak and the containment efforts, including “stay-home” orders issued in several states, make this an unforeseeable event which is clearly beyond the party’s control. Courts differ on whether the event needs to be “unforeseeable” or simply beyond the party’s control and here, too, it will depend upon the intent of the parties and the language of the clause (and other provisions).
However, I think most courts would agree that the virus and the resulting shutdowns were not foreseeable, and they were not within the control of contracting parties. There may be some exceptions if, for example, the contract was signed after the virus outbreak was known. In that case, I don’t think it would constitute a performance-excusing event because it was foreseeable and while the virus itself is not within a party’s control, at that point they could have controlled for the consequences (by, for example, taking out insurance or negotiating different delivery schedules). It is not the virus that is preventing performance in most cases – it is the ensuing crisis that it has caused.
Remember that just because the pandemic constitutes an unforeseeable event that is not within a party’s reasonable control does not mean all contractual performances are excused. Most clauses are worded so that performance has to be prevented by the event, not just made more difficult or less profitable. Examples might be if a venue was ordered closed or supplies were unavailable because suppliers were shut down.
Finally, performance may be only delayed and not excused (again, this depends upon what the contract says and what the performance entailed). So even if pandemic-related events prevent you from performing your contract in a timely manner, you may still be required to perform at a later date.
Remember a force majeure clause is not the only way to excuse performance. There are other defenses such as impracticability, impossibility and frustration of purpose. But these are topics for another day.
[i] Sun Operating Ltd. Partnership v. Holt, 984 S.W. 2d 277, 283 (Tex. App., Amarillo, 1998) (“when the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.”)
[ii] See, for example, TEC Olmos, LLC v. Conoco Phillips Company, 555 S.W. 3d 176 (2018) (finding a “catch-all” force majeure provision did not include foreseeable events).
[iii] PPG Industries, Inc. v. Shell Oil Co., 727 F. Supp. 285, 287 (E.D. LA, 1989).
[iv] Id. (Rejecting the argument that “reasonably beyond its control” qualifies the rest of the clause and stating that “’or’ means or, not ‘and.’”)
[v] Specialty Foods of Indiana, Inc. v. City of South Bend, 997 N.E. 2d 23, 27 (C.A. Ind., Oct. 9, 2013).
[vi] Kel Kim Corp. v. Central Market, Inc., 70 N.Y.2d 900, 524 N.Y.S. 2d 384, 519 N.E. 2d 295, at 296 n.* (1987))