March 31, 2020 FSLC Committee

A Closer Look At The Coronavirus Pandemic As A Force Majeure Event

Case Precedent Can Complicate The Interpretation Of Seemingly Simple Force Majeure Clauses

Colin C. Holley, Partner - Watt, Tieder, Hoffar & Fitzgerald LLP

Much has been written over the past few weeks about force majeure clauses and the impact of the novel coronavirus (COVID-19) pandemic on contract performance obligations.  Businesses across the commercial spectrum are trying to figure out whether they, or those with which they have contracted, are excused from contract obligations or have modified duties to perform.

The innumerable commercial disruptions inevitably caused by the travel restrictions, quarantine and social distancing orders, cancellations of large gatherings, and other efforts being taken to address the crisis—including disruptions such as labor shortages, delays in supply and distribution of materials, unavailability of services, and closures of workplaces—will undoubtedly qualify as a force majeure event under many contracts.  However, case precedent under the law of some states can be a trap for the unwary.  Such precedent can inject ambiguity into the interpretation of a force majeure clause that seems to clearly cover impacts from the pandemic.  Understanding the import of case precedent will allow you to more accurately assess your rights under contracts with force majeure clauses.                     

Determining Whether Your Contracts Have Force Majeure Clauses

Force majeure—which translated literally from the French means “superior force”—is the term commonly used for clauses that deal with unexpected events beyond the control of the contracting parties.  These are sometimes called “Acts of God” provisions, and may address natural disasters such as floods, tornadoes, earthquakes and hurricanes, or man-made disruptions such as acts of terrorism, riots, strikes, and wars.  Your contracts may have such a clause even if the specific terms “force majeure” or “Acts of God” are not used.  Look for any provision that addresses major events beyond the control of the contracting parties.  In many contracts the force majeure language is in the “miscellaneous” or “general” provisions near the end of the contract.  When a contract includes a force majeure clause, it will control the parties’ rights, obligations, and potential remedies when a disruptive event beyond the control of the parties occurs.   

If you have an impacted contract that does not have a force majeure clause your performance may still be excused.  The doctrine of force majeure is related to general principles of contract law that can apply to any contract unless overridden by the terms of a force majeure or similar clause.  Specifically, the law in certain narrow circumstances allows performance to be excused when it would be impossible or impracticable, or the core purpose of the contract has been frustrated, due to unexpected events.  The contours of rights under the doctrines of impossibility and frustration of purpose are beyond the scope of this article, but are very important to consider where a contract does not have a clearly-controlling force majeure clause.         

Determining Whether The Coronavirus Pandemic Is A Force Majeure Event

Determining rights, obligations, and potential remedies under a contract with a force majeure clause typically requires a complex analysis of the contract language, the governing law, and the totality of the situation.  The first step is to determine whether the coronavirus pandemic qualifies as a force majeure “event” under a clause.  In other words, does the clause and its various provisions even apply to a situation caused by the pandemic.  

Broad Clauses Without A List Of Specific Triggering Events

The starting point is always the language used in the clause.  Force majeure clauses may define a triggering event generally and broadly, simply as an unforeseen event beyond the control of the parties.  Such language should cover the coronavirus pandemic.

You should bear in mind, however, that such a clause may limit applicability in different ways.  It might, for example, say that performance is excused by the event only if performance would be impossible, or commercially impracticable.  In many situations it would be difficult to reasonably argue that performance is impossible or commercially impracticable if there is any means whatsoever of performing, irrespective of the unexpected cost and effort required, such as by finding other sources for manufacturing, supplies, or services.  On the other hand, if a clause specifically requires only a showing that performance would be “commercially unreasonable” or “an unreasonable financial hardship” under the circumstances, it would be much easier to argue that performance is excused.  

Clauses With A Specific Listing of Triggering Events and Catch-All Language

The trickiest force majeure clauses to correctly interpret are those that have a list of specific triggering events as well as catch-all language.  Consider, for example, a force majeure clause that states it applies to “acts of terrorism, riots, strikes, natural disasters resulting from weather, any other events not reasonably foreseen and not within the reasonable control of the parties.”  On its face such broad, inclusive language would seemingly include the unprecedented impacts of a communicable disease pandemic.  However, case precedent injects ambiguity into how such language would be interpreted.

In a 2007 case, Team Mktg. USA Corp. v. Power Pact, LLC, a New York court considered a force majeure clause in the context of a contract for the staffing of Toyota promotional marketing events.  The force majeure clause stated that it applied “if the subject promotion could not take place or the promotor was rendered unable to timely perform any of its obligations “for any reason, including, without limitation, strikes, boycotts, war, Acts of God, labor troubles, riots, and restraints of public authority.”  Surprisingly, the court held that language did not cover non-party Toyota’s cancellation or rescheduling of the promotion schedule because that type of event was not of “the same general kind or class” as the events specifically listed, notwithstanding the “for any reason” catch-all.  (See Team Mktg. USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 942, 839 N.Y.S.2d 242 (2007).) 

An Indiana court reached a contradictory result in a 2013 case, Specialty Foods of Indiana, Inc. v. City of S. Bend.  There, the court addressed a force majeure clause in the context of a contract for providing food and beverage services at the College Football Hall of Fame in South Bend, Indiana.  During the contract term the Hall of Fame unexpectedly relocated from South Bend to Atlanta, Georgia.  The force majeure provision of the contract excused performance if prevented “by reason of strikes, lockouts, inability to procure labor or materials, failure of power, fire or other casualty, acts of God, restrictive governmental laws or regulations, riots, insurrection, war or any other reason not within the reasonable control of” the party required to perform.  The court found the “any other reason” language of the clause made it broadly applicable to the unforeseen relocation of the Hall of Fame, even though relocation was not included in, or similar to, the specifically listed events.  (See Specialty Foods of Indiana, Inc. v. City of S. Bend, 997 N.E.2d 23, 27-28 (Ind. Ct. App. 2013).)

Given the existence of such contradictory case precedent, anyone assessing rights under a contract with a force majeure clause should engage experienced counsel to analyze the clause under applicable state law and the cases that have been decided in that state, particularly if the clause includes both a specific list of triggering events and catch-all language.  Getting a handle on how the clause is likely to be interpreted under applicable state law will put you in the best position to accurately assess your rights and obligations, and to plan a course of action.   

Clauses With A Specific Listing of Triggering Events

Some clauses specifically include “communicable diseases,” “disease outbreaks,” “epidemics,” or “pandemics” as triggering events.  If the contract clause lists any of these as covered events, the clause clearly applies and its provisions will control the rights and obligations of the parties.  Conversely, a clause that includes an exhaustive list that does not include anything arguably applicable will not apply—for example a clause that excuses performance only for a union workers’ strike.

The laws of most U.S. states require force majeure clauses to be interpreted narrowly.  Where the clause includes a specific listing of triggering events, other events that do not appear to have been within the contemplation of the contracting parties will not be viewed as force majeure events.  (See Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 524 N.Y.S.2d 384, 519 N.E.2d 295 (1987); Constellation Energy Servs. of New York, Inc. v. New Water St. Corp., 146 A.D.3d 557, 558, 46 N.Y.S.3d 25, 27 (1st Dept. 2017).)

That said, the coronavirus pandemic should trigger some force majeure clauses that do not include specific references to diseases, epidemics or pandemics.  Clauses that include “acts of government” or “states of emergency,” for example, will likely apply if a causal link between a government action and the impossibility of performance can be established.

Further Considerations and Recommendations

For the reasons discussed, consultation with experienced counsel is strongly urged in assessing rights and obligations pertaining to force majeure clauses.  As part of that consultation, consideration of the following is recommended:

  • Diligently monitor government actions, as new decisions may be made that change the analysis as to whether a force majeure event has occurred in relation to a particular contract.
  • Assess the potential consequences under the contract of claiming a right not to perform, as well as the impact that refusing to perform might have on your business reputation, as well as on existing and future relationships. 
  • Consider making a good faith attempt to either perform or to take other steps to achieve the contract’s goal.
  • If excused performance will be claimed under a force majeure clause, make sure to take all actions the contract requires as conditions of excusing performance, such as giving timely notice, mitigating damages, and following any dispute resolution procedures.
  • Create and keep detailed evidence proving that the pandemic made performance impossible, commercially impracticable, or commercially unreasonable (depending on the standard required under the force majeure clause).
  • Create and keep detailed evidence regarding efforts made to find alternative means of performing; communications with other contracting parties; and financial impacts, costs, and other losses incurred.
  • Review all insurance policies for business interruption coverage, coverage for losses resulting from actions by government “civil authority,” or other potentially applicable coverage.  Determining coverage can be quite complicated and qualified counsel should be consulted.  This determination should be made as soon as possible because it may inform the decision on whether to claim excused performance under force majeure clauses.  For purposes of future protection, work with counsel and your insurance broker on strengthening coverage for future events of this type.
  • When other businesses contact you to claim their performance is excused, consider renegotiation on terms that are reasonable given the situation.  If warranted, point out ways the other business could still perform or reasonable alternatives it could take in mitigation.      
  • Work with counsel to ensure future contracts have force majeure clauses specifically including communicable disease outbreaks, endemics, and pandemics, and clear terms addressing the parties’ rights and obligations, and applicable procedures after a triggering event.  In the context of construction project contracts, for example, the force majeure clause should specifically address and allocate the burdens resulting from the unexpected delays and costs, state limits on the remedies available to each party, and dictate the steps the parties must take to get performance back on track as soon as the threat has passed. 

Colin C. Holley

Partner - Watt, Tieder, Hoffar & Fitzgerald LLP

Colin Holley’s practice focuses on the litigation of complex business disputes for clients in a broad range of industries, including construction and real estate. Mr. Holley handles matters involving contract disputes, real property, unfair competition, intellectual property, and trade secret misappropriation. He has extensive experience in trials and appeals of matters in federal and state courts, and arbitration and mediation.  Prior to joining Watt, Tieder, Colin was a partner in the boutique litigation firm he co-founded, HamptonHolley LLP.  Colin was also formerly at Piper Rudnick (later merged into DLA Piper) and Preston Gates & Ellis (later merged into K&L Gates).

Mr. Holley holds an “AV Preeminent” rating for professional abilities and ethical standards with Martindale-Hubbell Peer Review Ratings. 

Mr. Holley’s legal leadership roles include serving as an arbitrator for the Orange County Bar Association Mandatory Fee Arbitration Committee, and formerly serving as a member of the Orange County Bar Association’s Client Relations Committee.

Memberships and Affiliations

·      American Bar Association

·       Federal Bar Association

·      Orange County Bar Association

Notable Decisions

·      ABF Capital Corp. v. Grove Properties Co., 126 Cal. App. 4th 204 (2005)

·       Magic Kitchen LLC, et al. v. Good Things International, Inc. et al., 153 Cal. App. 4th 1144 (2007)

JL Beverage Company, LLC v. Jim Beam Brands Co., 828 F.3d 1098 (9th Cir. 2016)

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