Force Majeure Clauses in the Aftermath of the Covid-19 Pandemic and the Implications for Government Entities

How Courts Determine Whether a Pandemic is Covered by Force Majeure

As stated above, force majeure clauses contained in a contract are specific to that contract. Thus, a court must look to the specific language in the contract to determine whether a pandemic applies to the clause or not.  In determining whether the clause applies, the courts have generally considered two factors: the language of the clause and the specific facts at issue.  

First, the court reviews the specific language contained in the contract to determine whether or not a pandemic would be included under the “triggering events” in the clause.  It is clear from the plain meaning rule that most courts interpreting a force majeure clause containing the words “pandemic” or “epidemic”, assuming the clause is part of a legally valid contract, would conclude that the current COVID-19 pandemic would fall under the scope of such clause. However, there is vast disagreement amongst courts as to whether the COVID-19 pandemic would be covered by a force majeure clause that does not employ these words.  Historically, when writing contracts, drafters rarely included “pandemics” in the force majeure clause, simply because the average person drafting a contract would not have considered them as a possible threat at that time. Therefore, most contract suits during this current pandemic revolve around force majeure clauses without the terms “pandemic” or “epidemic” included in the clause. As a result, courts are carefully interpreting the words of such clauses in their decision-making.   

Generally, the laws of most states require that courts interpret force majeure clauses narrowly and not give them expansive meaning.  This is because excusing a party entirely from their contractual obligations is an exception to this chief principle of contract law: 

It is an accepted maxim that pacta sunt servanda, contracts are to be kept. The obligor is therefore liable in damages for breach of contract even if he or she is without fault and even if circumstances have made the contract more burdensome or less desirable than he or she had anticipated.

Restatement (Second) of Contracts, Ch. 11, Introductory Note.

Thus, courts are hesitant to relieve a party of all its bargained for obligations unless they can find a firm justification for such excuse in the contract’s force majeure clause.  Such clauses are interpreted by the courts for their purpose in the contract, which 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.”  During the negotiation period, the parties “themselves define the contours of force majeure in their agreement, [and] those contours dictate the application, effect, and scope of the force majeure clause.  For example, a contract may state that performance under the contract must be “impossible” in order to trigger the force majeure clause. In such a case, if the parties could still complete their contractual obligations, even though it may not be under the most practical circumstances, they would still be contractually obligated to do so.  However, if the contract language used terminology such as “unreasonable,” it is much more likely that performance would be excused under the force majeure clause. 

Second, in making its determination, a court also looks at the specific facts of the case and surrounding circumstances at hand.  This means that the court will evaluate the reasons why the contractual obligations could not be met and determine whether the pandemic was the driving force behind the nonperformance.  Even if the current pandemic is covered by the force majeure clause, the party still might not be excused of its performance if the pandemic only delayed or hindered such performance.  In 2015, a Michigan court held that, even though a government act was specifically covered in the contract’s force majeure clause, the plaintiff was not excused from performance because he did not allege any specific act that prevented performance.  The court explained that the “plaintiff did not (although it again could have) negotiate a contractual force majeure clause that by its terms would have excused contractual performance resulting from unprofitability due to governmental market manipulation.”  This case demonstrates the fact-intensive inquiry courts must undergo when evaluating whether a party can invoke a force majeure clause to excuse itself from all performance obligations in a validly executed contract. Not only must a court find that the COVID-19 pandemic was intended by both parties, at the time the contract was executed, to fall under one of the categories listed in the adopted force majeure clause, but the pandemic must also render performance by one of the parties impracticable or impossible after reviewing the unique facts controlling the case. 

Litigation Thus Far

Historically speaking, severe economic impact alone has not been sufficient to trigger force majeure in past case law. In contractual litigation during the 2008 recession, parties attempted to use force majeure to negate their contractual obligations due to significant workforce layoffs and plummeting revenues. However, it seems clear from current litigation that courts are viewing the pandemic as causing something more than just severe economic injury. It is fruitful to examine cases in two states involving government contracts to better understand the approach courts use to analyze force majeure clauses.

I. Virginia (Narrow Reading)

The Town of Culpeper was involved in litigation with Regal Cinemas after the movie theatre ceased operations because of the COVID-19 pandemic.  The relevant force majeure clause in the lease executed between the parties only applied if “the Complex or other improvements on the Property, or any part thereof, are damaged or destroyed by fire, flood, natural causes, or other casualty[.]”  The United States District Court for the Western District of Virginia began analyzing this clause by expressing the principle that “‘courts must construe contracts as written.’”  After carefully reviewing the language in the force majeure clause, the court held that, because the clause only contemplated physical damage to the property, the COVID-19 pandemic could not excuse Regal Cinemas from its performance. 

II. Vermont (Specific Mention of Pandemic in Force Majeure Clause)

In a suit against the University of Vermont & Agricultural College, an agent of the State, students alleged that the force majeure clause in their Housing and Meal Plan Contract did not excuse the university of refunding them for their room and meal fees.  The clause at issue states:

In the event that the University of Vermont closes due to a calamity or catastrophe beyond its control that would make continued operation of student housing infeasible, such as a natural disaster, a national security threat, or widespread pandemic flu, room and meal plan fees will not be refunded.

Id. at 20.

The United States District Court for the District of Vermont began analyzing this clause by expressing contract interpretation principles.  If the language was unambiguous, the court would construe the language based on its plain meaning and in context of the four corners of the contract.  Although the force majeure language, read in isolation, could be interpreted as referring to closure of the entire campus and all of its operations, the court held that in context of the entire contract, the word “‘closure’ unambiguously refers to closure of the facilities necessary to provide student housing and meals.”  Because such “closure” was due to the COVID-19 pandemic, therefore, the university was excused from refunding the students. 

Both cases illustrate each court’s unique style of analyzing the express words in a force majeure clause and interpreting such clause in light of the surrounding facts. The Virginia court held that the force majeure clause did not apply while the Vermont court held that the force majeure did excuse performance of refunding the students their meal and room fees. Another leading case worth analyzing closely is regarded as the eminent COVID-19 force majeure litigation: JN Contemporary Art LLC v. Phillips Auctioneers LLC. 

Litigation arose in the United States District Court for the Southern District of New York when Phillips terminated an agreement with JN to auction a work of art due to New York Governor Andrew Cuomo’s executive orders that effectively shut down all nonessential businesses.  Instead of rescheduling the event, Phillips cited the force majeure provision in the contract and opted to end the contract. This ultimately led to JN suing for breach of contract.  The court analyzed the language of the contract and determined that Phillips’ performance under the contract was excused.  In its holding, the court agreed that force majeure provisions in contracts should not be given an expansive view; however, in this case, it found that the COVID-19 global pandemic, which was infecting and killing Americans at a rapid pace, should be considered a natural disaster under the clause.  The principles the court used to conclude that the current pandemic fell under the category of “natural disaster” warrant a close examination.

The force majeure clause at the heart of this litigation states:

In the event the auction is postponed for circumstances beyond our or your reasonable control, including, without limitation, as a result of natural disaster, fire, flood, general strike, war, armed conflict, terrorist attack or nuclear or chemical contamination, we may terminate this Agreement with immediate effect.

Id. at 6 (emphasis added).

Like the United States District Court in the District of Vermont, the JN Court first expressed the relevant canons of contract interpretation.  The court then expressed widely accepted principles of construction for force majeure clause, as expressed and quoted in the prior paragraph.  Before analyzing the specific clause in this case, the court reaffirmed that these clauses “‘are not to be given expansive meaning[.]’”  The court held generally that the COVID-19 pandemic fell under the category of an event beyond the reasonable control of the parties and then focused specifically on the language of the force majeure clause. 

The court examined two dictionaries to understand whether the pandemic fit under the definition of “natural disaster” employed in the force majeure clause.  The court found that the pandemic fit within both definitions and, even absent such definition, the pandemic would also fit in the force majeure clause based on the other named events that would excuse performance, which included major economic upheaval and climate disasters.  To reinforce its holding, the court rebuffed the plaintiff’s argument about the ejusdem generis principle. 

According to New York Law, ejusdem generis is a canon where “the meaning of the word in a series of words is determined by the company it keeps.”  The court explained that the pandemic did fit in the general definition of circumstances outside the reasonable control of the parties.  Furthermore, the court reasoned that “the inclusion of listed items cannot narrow the general definition, in particular when the contract indicates that the listed items are not given to limit the definition.”  This sentence suggests that the outcome may have been different if the force majeure clause did not include “without limitation” language and/or the word “natural disaster”. 

Although this court concluded that the pandemic excused performance based on this specific force majeure clause, other force majeure clauses that are the subject of pending litigation are not as generous in the events they expressly cover. Therefore, although general trends can be ascertained from examining cases nationwide involving force majeure and the pandemic, there is no consensus or bright-line rule dictating how courts will rule.  What can be derived, however, from the nationwide trend is that courts will focus their analysis on the words employed in the force majeure clause first and then, if necessary, resort to the factual circumstances surrounding the case and canons of contract interpretation for ambiguous language to decide whether a pandemic fits within the force majeure definition.

Conclusion

The COVID-19 pandemic has made it clear that the details and wording of a contract and its force majeure clause are more important than ever. The COVID-19 pandemic is now seen as less unforeseeable than two years ago and claims invoking the force majeure clause currently will likely “make it more difficult than ever for parties to defend breach of contract claims by arguing that their nonperformance was pandemic-related.”  Considering that courts look specifically to the language of the agreement, it is important that when government lawyers are negotiating contracts with outside parties going forward, they must pay close attention to the wording of the force majeure clause and what events fall under it. 

Although the JN court did not give the clause an expansive view, it held that the contractual obligations were excused due to the surrounding circumstances. During the subject stage of the pandemic, New York had temporarily shut down all nonessential businesses in the state, which made completion of the contract impossible in the opinion of the court. 

As the pandemic waxes and wanes, the “surrounding circumstances” will change accordingly. Therefore, it is wise for government lawyers to insist that force majeure clauses contain clear language that include pandemics and pandemic-like situations and the ever-varying circumstances that surround such an emergency.