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Force Majeure and Contractual Non-Performance During the Coronavirus Pandemic

March 19, 2020 Articles

Never in the experience of most of us has an event so thoroughly interrupted business as usual as the coronavirus (COVID-19) pandemic. Everywhere, contract parties 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.[1]

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.”[2] 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.[3] 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.[4]

In evaluating whether a force majeure clause excuses performance of a contract due to COVID-19, consider the following:

  1. Does the force majeure provision include a pandemic or public health emergency, either explicitly or implicitly?  If the provision lists qualifying events, does it also state that those events are not an exhaustive list?
  2. 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.
  3. How strong and direct is the causal connection between COVID-19 and the impediments to performance?  For example, consider a contract that requires a party to have a large number of people present at a specific place at a specific time. If a shelter-in-place order is in effect at that time and for that place, that may support the party’s invoking force majeure, especially if the force majeure clause cites governmental actions as a qualifying event.
  4. Is it possible to mitigate the effect of COVID-19 on the performance of the contract?  Consider whether a contract can be partially performed with commercially reasonable measures in case force majeure does not apply.
  5. Is it actually impossible or impracticable for the party to perform?[1] 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. Note that even in the absence of a force majeure clause, a party may still be able to argue impossibility or impracticability as a defense to performance of an obligation.

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, in recent days 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. 


[1] California Civil Code Section 1597 defines “impossibility” as follows: “Everything is deemed possible except that which is impossible in the nature of things.” California courts have interpreted “impossibility” strictly: “Where a party has agreed, without qualification, to perform an act which is not in its nature impossible of performance, he is not excused by the difficulty of performance, or by the fact that he becomes unable to perform.” Irwindale Citrus Ass'n v. Semler, 60 Cal. App. 2d 318, 324 (1943). By contrast, “impracticability” may arise when the contract “can only be done at an excessive and unreasonable cost”: “where performance depends upon the existence of a given thing, and such existence was assumed as the basis of the agreement, performance is excused to the extent that the thing ceases to exist or turns out to be nonexistent.” Mineral Park Land Co. v. Howard, 172 Cal. 289, 292 (1916). Courts have interpreted impossibility to include impracticability.

 

[1] Here is a typical force majeure clause: “The parties’ performance under this Agreement is subject to acts of God, war, government regulation, terrorism, disaster, strikes (except those involving the parties’ employees or agents), civil disorder, curtailment of transportation facilities, or any other emergency beyond the parties’ control, making it inadvisable, illegal, or impossible to perform their obligations under this Agreement. Either party may cancel this Agreement for any one or more of such reasons upon written notice to the other.” Force Majeure clauses, 30 Williston on Contracts § 77:31 (4th ed.) (citation omitted).

[2] Horsemen's Benevolent & Protective Assn. v. Valley Racing Assn., 4 Cal. App. 4th 1538, 1564 (1992), modified (Apr. 6, 1992)

[3] Force Majeure clauses, 30 Williston on Contracts § 77:31 (4th ed.).

[4] Id.

[5] California Civil Code Section 1597 defines “impossibility” as follows: “Everything is deemed possible except that which is impossible in the nature of things.” California courts have interpreted “impossibility” strictly: “Where a party has agreed, without qualification, to perform an act which is not in its nature impossible of performance, he is not excused by the difficulty of performance, or by the fact that he becomes unable to perform.” Irwindale Citrus Ass'n v. Semler, 60 Cal. App. 2d 318, 324 (1943). By contrast, “impracticability” may arise when the contract “can only be done at an excessive and unreasonable cost”: “where performance depends upon the existence of a given thing, and such existence was assumed as the basis of the agreement, performance is excused to the extent that the thing ceases to exist or turns out to be nonexistent.” Mineral Park Land Co. v. Howard, 172 Cal. 289, 292 (1916). Courts have interpreted impossibility to include impracticability.

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