The business community is faced with unforeseen litigation risk, in addition to the other challenges it faces from the coronavirus pandemic. Among other issues, the crisis is compromising the ability of parties to perform contracts. The unfolding situation is implicating previously seldom-used contractual excuses in a variety of commercial contexts. This article explores potential frameworks for navigating contractual challenges in light of potential future litigation.
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic and the United States suspended most travel from Europe for 14 days. The human and economic toll of the outbreak has already eclipsed other major crises in recent memory and the situation is rapidly evolving.
On March 10, 2020, the CDC issued new guidelines for employers and businesses—recommending proper hygiene, ventilation, reducing meetings and gatherings, and reconsidering travel. The updated guidelines complement steps already taken by many in the private sector to combat the epidemic. Businesses have quashed non-essential travel, cancelled events, suspended sporting events, encouraged employees to work from home, and taken other aggressive measures to prevent an outbreak in their workplaces. These disparate benchmarks create challenges for institutions assessing the proper response to an evolving situation.
Contractual parties would be wise to keep track of the scope and applicability of force majeure clauses.
“The purpose of a force majeure clause is to limit damages in a case where the reasonable expectation of the parties and the performance of the contract have been frustrated by circumstances beyond the control of the parties.” A sample force majeure clause might read:
The parties’ performance under this Agreement is subject to acts of God, war, government regulation, terrorism, disaster, civil disorder, curtailment of transportation facilities, or any other emergency beyond the parties’ control, making it 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.
Courts in the United States look at various elements when considering a claim of force majeure, always starting with the language of the contract.
(1) Does the contract contain an applicable force majeure clause? There must be a contractual force majeure clause that encompasses the claimed force majeure event. Force majeure clauses are construed narrowly and only applied to the events listed on the face of the contract. Catch-all language will only bring into the clause events of “the same character or class as the specific events mentioned.”
- In a seminal New York case, the Court of Appeals refused to apply a force majeure clause to excuse the performance of a party that lost its contractually required insurance coverage and could not obtain insurance from any insurer. The contract’s force majeure clause had broad catch-all language but the court construed “other similar causes beyond the control of such party” as related to day-to-day operational concerns, which the court found did not include the ability to obtain sufficient liability insurance.
- In another defining case, a New York appellate court applied a force majeure clause that included “governmental prohibition” to excuse performance interrupted by a judicial restraining order. The court reasoned that a judicial order, though not specifically enumerated, fit into the category of governmental prohibition.
(2) Was the force majeure foreseeable? If there is an applicable force majeure clause but the epidemic is not listed, rather it is only captured through catch-all language, some courts may independently inquire whether the applicable event was truly an unforeseeable great force.
(3) Was performance rendered impossible? Performance will generally only be excused if the force majeure clause rendered performance impossible. Courts may look into whether performance was attempted and failed before excusing performance for a force majeure, though this varies by jurisdiction and can usually be overcome by the language of the contract. Courts will usually find that a government order prohibiting performance renders contractual performance impossible and therefore, excused.
- In an oft-cited decision, the U.S. Court of Appeals for the Second Circuit held that, although a foreign coast guard detained a ship en route and prevented shipment, the force majeure clause could not be invoked to excuse performance; the seller fulfilled its duty to ship the product and nothing made it impossible for the buyer to issue payment.
- Following the global financial crisis of 2008, a party claimed that it was impossible to build a restaurant because it needed its limited funds to meet debt obligations. A New York appeals court refused to excuse performance despite a broad force majeure clause, reasoning that “financial hardship” is not grounds for invoking force majeure.
- The devastating effects of the notorious Spring 2015 avian flu outbreak on a poultry famer’s operations did not suffice to cancel an order for no-longer-needed machinery. Although the farmer was no longer building the site for which the machine was ordered, the force majeure clause applied to the machine supplier’s ability to perform, and no force majeure prevented the supplier from performing.
(4) Was it the force majeure that rendered performance impossible? The occurrence of a force majeure and coincidental impossibility of performance are not enough to excuse performance; it must be the force majeure that renders performance impossible.
(5) Have all contractual prerequisites been met? Parties should pay careful attention to the particular requirements of the contract. Some contracts require due diligence, notice, and/or seeking assurance before force majeure can be raised as an excuse. Courts will not overlook these requirements.
What if performance is rendered prohibitively difficult by the virus? In some cases, a force majeure may be a sufficient excuse even where performance was not truly impossible but rendered prohibitively difficult. When 1989’s Hurricane Hugo rendered oil facilities inoperative, a court excused an oil supplier’s delay due to “post-hurricane congestion” in oil production and shipments. Although the supplier was able to provide some customers, it was impossible for it to immediately supply all its customers without some delay. This delay was excused under the force majeure clause.
What can be done in anticipation of litigation over a force majeure clause? A duty to act in good faith is implied in every contract, though it does not override the express terms of the contract. And helpful, contemporaneous documentation may make the difference in close cases. Parties should pay particular attention to the effect of government interventions such as travel and import restrictions, as these are often the most compelling bases for invocation of a force majeure clause.
- Consider the case of a radio manufacturer that refused to ship radio parts to a Swedish supplier of the Islamic Republic of Iran after the United States government prohibited sales of military equipment to Iran. The parties’ contract included a force majeure excuse for “governmental interference” but the supplier argued that the government did not force the manufacturer not to ship. The court ruled that the government order alone sufficed to trigger the force majeure—the government has the ability to compel compliance and for purposes of force majeure, there is no practical choice other than to obey.
This is only one of the many potential legal issues posed by the spread of the novel coronavirus. If you have any questions about the issues addressed here or otherwise, please do not hesitate to reach out to us.
Christopher Kercher, Andrew Rossman and Brian Timmons are partners, and Jonathan Feder is an associate, at Quinn Emanuel Urquhart & Sullivan.