July 06, 2020 Articles

Is the Force Majeure With You?

A review of potential applications of "act of God" clauses in Delaware, in light of COVID-19

By Travis S. Hunter and Renée Mosley Delcollo

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Due to the sudden increase of executive orders barring travel in response to the COVID-19 pandemic, many businesses have begun to evaluate their contractual obligations to determine what happens if performance becomes difficult or impossible. “Acts of God” have been included in force majeure clauses of many contracts—to the point of becoming boilerplate in many cases—but are rarely invoked or interpreted by courts. In these uncertain times, however, such provisions are likely to become the subject of increased litigation—particularly in Delaware, because many contracts contain Delaware choice of law and forum provisions. How Delaware courts interpret force majeure clauses in the coming months and years will go a long way to determining whether COVID-19 is truly an “act of God” or otherwise provides a basis to excuse performance of contractual obligations. 

Indeed, in the face of potential litigation, parties must determine if there have been any events triggering a force majeure clause (i.e., an adverse event beyond the control of the parties). For example, increased delays and expense, or an executive order that requires a business to operate at a 30 percent capacity may not excuse nonperformance under Delaware law. Conversely, an executive order that prohibits all business operations of a particular industry because it is “nonessential” may constitute an “act of God.” Of course, all of this depends on the language of the parties’ agreement. A party seeking to enforce a contract may argue that plain meaning controls and because the clause excludes terms such as “pandemic,” “illness,” or “disease,” then there is no excuse for nonperformance. On the other hand, one could also argue that a force majeure clause is ambiguous and seek to introduce parol evidence. While all of this is currently hypothetical at this point, businesses and individuals alike should familiarize themselves with the interpretation of force majeure clauses under Delaware law and other options available to them.

Interpretation of Force Majeure Clauses Under Delaware Law

A force majeure clause defines an area of events that might excuse nonperformance within the contract period. VICI Racing, LLC v. T-Mobile USA, Inc., 763 F.3d 273, 287 (3d Cir. 2014) (applying Delaware law). Under Delaware law, those relying on a force majeure clause must show that their nonperformance was a consequence of an adverse event beyond their control. Stroud v. Forest Gate Dev. Corp., No. CIV.A. 20063-NC, 2004 WL 1087373, at *4-5 (Del. Ch. May 5, 2004). Reasonable, unextreme economic hardship, however, cannot constitute a force majeure itself. VICI Racing, LLC, 763 F.3d at 288.

One may ask, does a force majeure clause cover events like the COVID-19 pandemic? Well, the answer is (albeit cliché), “it depends.” Similar to other contractual provisions, application of a force majeure provision starts with the words chosen by the drafters. Stroud, 2004 WL 1087373, at *5. Under Delaware law, when a contract is clear and unambiguous, courts will give effect to the plain meaning of the contract’s terms and provisions. Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159–60 (Del. 2010). The parties’ disagreement over the interpretation of a contract is not enough to render its terms ambiguous. Id. Instead, the court may find that a contract is ambiguous if it can reasonably ascribe multiple and different interpretations to the contract. Id. An unreasonable interpretation produces an absurd result or one that no reasonable person would have accepted when entering the contract. Id. If a contract is ambiguous, the court applies the doctrine of contra proferentem against the drafting party and interprets the contract in favor of the non-drafting party. Id.

This is particularly important when looking at force majeure clauses in the face of global pandemics, like COVID-19. While Delaware courts have not yet addressed the issue of force majeure clauses in the wake of a global pandemic, prior cases provide guidance on how a court might address this issue in the future. For example, in Stroud, the Delaware Court of Chancery held that the plaintiffs were entitled to specific performance of their contracts to purchase townhouses and various delays in the development progress were not the “meat” of the parties’ force majeure clause. Stroud, 2004 WL 1087373, at *5. The parties’ force majeure clause stated in pertinent part: “[The defendant] shall not be held responsible for, and is hereby relieved and discharged from all liability by reason of any delay in completion of premises or settlement caused by changes ordered by buyer, [buyers’ delay in making material or color selections], fire, strikes, acts of God, or any other reason whatsoever beyond the control of [the defendant].” Id. The court concluded that “catch-all” phrases, such as “whatsoever,” must be construed within the context established by the preceding listed causes. Id. The court reasoned that while the use of catch-all phrases suggests that an especially narrow reading of the phrase was not intended, too broad of a reading would reduce the agreement to little more than option, because delays, in the absence of a diligent effort to avoid them, are almost inevitable in the real estate development setting. Id. In so holding, the court interpreted the clause to encompass two concepts: first, the delay-causing event was beyond the reasonable control of the defendant, and second, the event was not reasonably foreseeable in the ordinary course of real estate development. Id. The court did not, however, suggest that all force majeure clauses must be read to incorporate the concept of foreseeability. VICI Racing, LLC, 763 F.3d at 288.

Other Options Under Delaware Law

So, what happens if the contract does not have a force majeure clause or the clause is not directly applicable based on the language used? Even in such circumstances, defenses to performance may still be available. Such defenses include impracticability or impossibility and commercial frustration of purpose. To assert the defense of impracticability or impossibility, a defendant must demonstrate the following: “(1) the occurrence of an event, the nonoccurrence of which was a basic assumption of the contract; (2) the continued performance is not commercially practicable; and (3) the party claiming impracticability did not expressly or impliedly agree to performance in spite of impracticability that would otherwise justify nonperformance.” Bobcat North Am., LLC v. Inland Waste Holdings, LLC, 2019 WL 1877400, at *6 (Del. Super. Ct. Apr. 26, 2019) (internal quotation marks omitted). However, “[w]here the party has assumed the risk that the ‘impracticable/impossible’ event might occur, the defense does not apply.” Id.

The doctrine of commercial frustration excuses future performance “[w]here, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances indicate the contrary.” Wal-Mart Stores, Inc. v AIG Life Ins. Co., 901 A.2d 106, 113 (Del. 2006). “This common law doctrine ‘provides an escape for an acquirer if the target experiences a catastrophe during the executory period.’” Akorn, Inc. v. Fresenius Kabi AG, 2018 WL 4719347, at *57 (Del. Ch. Oct. 1, 2018).  

Conclusion

Courts in other jurisdiction have addressed these issues but, like Delaware, have not yet ruled on whether COVID-19 will satisfy a force majeure clause. See, e.g., Constellation Energy Servs. of New York, Inc. v. New Water St. Corp., 46 N.Y.S.3d 25 (N.Y. App. Div. 2017); Allegiance Hillview, L.P. v. Range Texas Prod., LLC, 347 S.W.3d 855 (Tex. App. 2011). It goes without saying that COVID-19 is a novel issue for many aspects of life, including Delaware contract law. Businesses continue to face uncertainty as the current situation continues to evolve on a day-by-day basis, impacting their operations and contractual obligations. Parties seeking to rely on a force majeure clause should be prepared to defend against claims that the clause is ambiguous or fails to expressly provide for certain events, which would excuse nonperformance in circumstances such as the present situation. Additionally, businesses and individuals should consider other defenses such as impossibility or impracticability and commercial frustration of purpose.

Travis S. Hunter is a director and Renée Mosley Delcollo is an associate of Richards, Layton & Finger, P.A., in Wilmington, Delaware.


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