Never in the experience of most of us has an event so thoroughly interrupted business as usual as the coronavirus pandemic. The wine business runs on contracts: grape purchase agreements, event hosting contracts, vineyard leases, custom crush arrangements, to name a few.
Everywhere, contract parties unable to conduct or facing severe stress in their businesses are reassessing their contractual rights and obligations, especially under “force majeure” clauses. These common clauses are one type of provision that may serve to excuse a party from performing under a contract when an “act of God” or other extraordinary circumstance beyond the parties’ control prevents performance.
Be warned: a force majeure clause is not a “get out of jail free” card. The important point to know is that just because a contract has a force majeure clause doesn’t mean that one or both parties are excused from their obligations, even if circumstances have turned unexpectedly bad.
Whether a force majeure clause applies will depend on the specific language of the clause itself and the facts making it difficult or impossible for a party to perform as originally expected.
The party relying on the clause bears the burden of proving that it applies, and courts have interpreted these provisions narrowly. Force majeure is not necessarily limited to an “act of God.” As one California court has explained, the “test is whether under the particular circumstances there was such an insuperable interference occurring without the parties’ intervention as could not have been prevented by prudence, diligence and care.”
But a business downturn is not usually considered an act of God and economic hardship alone will typically not excuse performance under a force majeure clause. Nor will a mere increase in expense, unless the contractual act has become impossible or impracticable due to an excessive, unreasonable, and unbargained-for expense.
In evaluating whether a force majeure clause excuses performance of a contract due to COVID-19, consider the following:
- If an event needs to be canceled, does the event contract include a force majeure provision that refers to a quarantine, pandemic, or public health emergency, either explicitly or implicitly?
- If the event is scheduled for a period during which shelter in place orders are in effect, does the clause reference governmental actions?
- If the provision lists qualifying events but not one that specifically applies, does it also state that those events are not an exhaustive list?
- Was a pandemic foreseeable by the contracting parties such that the general “circumstances beyond a party’s control” force majeure test may not be met? For example, a contract executed after the WHO declared a global pandemic may not qualify for excused performance under force majeure if the interference was foreseeable.
- How strong and direct is the causal connection between COVID-19 and the impediments to performance? For example, if a grape purchase agreement is in question, is the pandemic or a government order preventing marshaling the labor needed to harvest or receive the grapes?
- Is it possible to mitigate the effect of COVID-19 on the performance of the contract? Can an event be rescheduled? Consider whether a contract can be partially performed with commercially reasonable measures in case force majeure does not apply. Can a smaller grape harvest be delivered and received with the labor at hand?
- Is it actually impossible or impracticable for the party to perform? Consider whether it is actually impossible to perform the contract due to COVID-19, or whether it has just become prohibitively expensive to do so.
It should come as no surprise after reading this that parties considering invoking force majeure should be sure to document all the ways in which COVID-19 has made the contract impossible or difficult to perform and the causal links between the virus and contractual impediments as specifically as possible.
Ultimately, a force majeure clause is a limited and specific modification of how risks are allocated among the parties in a contract and therefore will only be allowed to the degree the contract specifically provides.
That said, given the unprecedented nature of this global pandemic, we have found that some entities have been more flexible in their interpretation of these clauses and willing to negotiate mutually agreeable resolutions where certain guarantees can be made.
Determining whether a force majeure clause will excuse performance of a contract requires careful review of the contract language and facts involved.
Other kinds of provisions in a contract may also be able to provide relief for parties struggling to perform a contract due to COVID-19. Additional considerations such as whether insurance is available to the party who cannot perform should be evaluated as well.