COVID-19 Force Majeure Litigation
Throughout the COVID-19 pandemic, parties to commercial contracts have invoked force majeure clauses to excuse nonperformance caused by pandemic-related shutdowns, labor shortages, supply chain issues, and many other disruptions. At the beginning of the pandemic, there was much conjecture about how courts would approach force majeure clauses during the pandemic era. Now that the courts have been grappling with these issues for two years, parties and litigators have more insight as to how the courts will approach force majeure contract disputes.
The first step in the analysis, as with all contract interpretation issues, is to examine the language of the contract. Each force majeure clause is unique to the contract. If the clause explicitly references a “pandemic” or “epidemic,” then most courts likely would conclude that the COVID-19 pandemic was a triggering event. Unfortunately, the inquiry is rarely so simple for contracts drafted prior to 2020; few force majeure clauses contained such a direct reference to pandemic-related concerns. Courts have differed widely in whether the pandemic falls within any of the events more commonly listed in force majeure clauses.
Second, the party invoking the force majeure clause must prove a causal relationship between the force majeure event and the party’s inability to perform its contractual obligations. Courts undertake a fact-intensive inquiry to determine whether the event rendered performance impossible or impracticable. If the pandemic merely delayed performance or made it more difficult or expensive, then the court could find that performance was not excused. Historically, even severe economic impact was insufficient to successfully invoke a force majeure clause. David Farren, “Force Majeure and the Coronavirus Pandemic: A Case Law Update” Jaburg Wilk, Feb. 12, 2021.
Many attempts to invoke force majeure in the pandemic context have failed to demonstrate the requisite causality. However, some courts have found that the pandemic was a contributing mitigating favor, even if it did not completely excuse performance. Eleanor Vaida Gerhards, “Insurance and Force Majeure: Decisions and Trends,” in 2022 Judicial Update (Int’l Franchise Ass’n Annual Legal Symposium, May 15–17, 2022). For example, one court set aside a default judgment against a former franchisee (id. (discussing Nails v. Hoang Minh T Ha, No. 20-14388-CIV-MARTINEZ/MAYNARD, 2021 BL 343870, 2021 U.S. Dist. LEXIS 172265 (S.D. Fla. Sept. 9, 2021))), and another court considered the pandemic in crafting injunctive relief to enforce a noncompete (id. (discussing Jackson Hewitt Inc. v. Collins Njoku, Civ. No. 21-7665 (D.N.J. May 6, 2021))).
Third, in most cases, the force majeure event must have been unforeseeable at the time the parties entered the contract. Erin Webb, “Analysis: No Longer Unforeseeable? Force Majeure and Covid-19,” Bloomberg Law, Nov. 1, 2021. Two years into the pandemic, courts are becoming increasingly reluctant to find that COVID-related disruptions were unforeseeable. Id. Moreover, the inclusion of “pandemic” or “epidemic” in a force majeure clause may undermine a party’s argument that the risk was unforeseeable. Parties are less likely to successfully invoke force majeure clauses for COVID-related issues in contracts signed after the outbreak of the pandemic.
Other Contract Defenses
Alternatively, parties seeking to avoid performance can invoke contract defenses like impossibility or frustration of purpose. These defenses saw some success, especially for entertainment businesses, in light of government-mandated shutdowns. Id.
Many of these cases failed, however, due to foreseeability. As noted, economic hardship generally does not excuse performance. A business cannot excuse performance simply because it finds itself in a dire financial condition, even if the pandemic caused that financial condition. Id. More recently, courts are beginning to find that COVID-19 is no longer unforeseeable for contracts entered after the initial outbreak.
For the past two years, force majeure clauses and similar defenses have provided some respite for some parties to contracts that were affected by the COVID-19 pandemic. Increasingly, though, courts are finding that pandemic-related disruptions are outside the scope of force majeure clauses. Parties to contracts entered into after the initial outbreak may experience more difficulty invoking force majeure clauses to excuse performance.