By: William Cory Spence, Michael McDonough & Daniel Hess
Traditionally, it was nothing more than standard boilerplate contract language or a legal theory that bar exam students crammed into their heads at the last minute. But with the outbreak of COVID-19 the force majeure contract clause is seeing new light and becoming a hot topic for discussion with litigation sure to follow. With businesses across the country scrambling to adhere to new and evolving employment processes and federal and state emergency procedures, the question as to whether a they can fulfill their contractual obligations is now front and center. If the economic impact of COVID-19 is impacting your business or existing contracts, it is crucial to understand the scope and limits of the force majeure clause, as well as related common law doctrines, to make an informed decision of your rights and remedies.
- Force Majeure
Force majeure is a civil law concept and contractual provision meaning “superior force.” It traces its roots back to the French Napoleonic Code but is a standard provision in almost all modern-day contracts around the globe. The provision allocates risk if performance of a contract becomes impossible or impracticable as a result of an event or effect that the parties could not have anticipated or controlled.
While most contracts attempt to identify and apportion liability for any potential breach situation, force majeure is intended to allocate for the unseen or unexpected. A standard force majeure contractual article typically includes language which alleviates liability for breach in the event that performance is delayed or prevented by any act of God, fire, natural disaster, accident, act of government, shortage of materials or supplies, act of terror, act of third parties, or any other cause beyond the reasonable control of such party. Such provisions usually outline a gamut of different acts which may include specific language regarding mass health issues such as the current COVID-19 pandemic.
If your contract does have specific language regarding an “epidemic” or “pandemic” you can take a breath knowing that relief may be within your reach. However, even if the force majeure clause contains this specific language, additional actions usually need to be taken and further analysis may need to be done to analyze other important contractual aspects. First, many contracts require notice to be given if a party is to invoke provisions such as force majeure. Usually these clauses will identify the specific time period within which a party must notify the other that it is invoking the clause and failure to adhere to this requirement may lead to a waiver of its protection. Second, further analysis is required to understand and identify two additional contractual areas: status of the contract moving forward (termination, option for termination, rescission) and payment terms (full payment, non-refund, pro-rata payment, credits). Simply identifying whether the force majeure clause is applicable to your current situation may not be the end of your analysis, as a complete understanding of rights and responsibilities is necessary.
It is certainly probable that many existing contracts do not contain the specific language accounting for “pandemics” or “epidemics” which would directly apply to the current COVID-19 outbreak.
If this is the case, it is important to note that courts typically hold that force majeure clauses are to be narrowly construed against the party that is invoking the provision to excuse performance.1 Businesses that lose available workers or that are hit with financial difficulties associated with the spread of COVID-19, may no longer be capable of performing their obligations under a contract. Unfortunately, such financial hardship alone may not be enough to provide protection under a force majeure clause. Courts around the country routinely hold that financial hardship and unprofitability do not constitute the type of delay or failure in performance sufficient to warrant relief under a force majeure clause.2 Further, courts have gone so far as to rule that a force majeure clause does not excuse performance for economic inadvisability, even when the economic conditions are the product of a force majeure event.3 Such events will almost certainly become more prevalent as we continue to feel the impact of the current pandemic.
- Doctine of Impossibility
If the force majeure clause is unable to provide your business the protection you require, several common law doctrines might be available as defenses in justifying non-performance of contractual obligations given certain extenuating events. One such defense is the doctrine of impossibility. The doctrine of impossibility is an affirmative defense that may be raised in a breach of contract action to excuse liability for non-performance under a contract and is relatively uniform across most state jurisdictions.4 For example, under Illinois law the doctrine “excuses performance of a contract only when performance is rendered objectively impossible either because the subject matter is destroyed or by operation of law.”5 This doctrine comes directly in to play given the recent actions of state and local authorities as they deal with the COVID-19 pandemic and the ever-increasing number of confirmed cases. For example, in addition to limiting the number of people at any specific gathering, on March 15, 2020, Illinois Governor J.B. Pritzker ordered all bars and restaurants in the state to be closed through March 30, 2020. Such a government ban on group gathering and the shuttering of bars and restaurants may render many contracts associated with event planning, catering or other events to be a contractual impossibility. If any of the recent COVID-19 emergency laws/regulations enacted outlaw performance of your contract obligations, this common law doctrine may insulate your business from liability.
- Doctrine of Commercial Frustration
The doctrine of commercial frustration is closely related to impossibility as it may also serve as a potential contractual defense during the COVID-19 pandemic but with a key difference. Commercial frustration is more open-ended but arguably just as limited as the doctrine of impossibility. Commercial frustration acts as a complete defense for non-performance “[rendering] a contract unenforceable if a party’s performance under the contract is rendered meaningless due to an unforeseen change in circumstances.”6 While impossibility requires either destruction of the subject matter or a change in governing law, commercial frustration provides a wider range of circumstances that can justify non-performance. Essentially, the circumstances of a party’s relationship must change so drastically, in an unforeseen manner, that the entire purpose of the contract has been frustrated. For example, as all of the major sporting bodies in the United States suspend or terminate play, tangential contractual relations between the teams and venue owners, concession suppliers, event coordinators, media providers and/or advertisers will all be directly impacted by the stoppage of play. The availability of the defense of commercial frustration may be applicable to these parties given the aggressive nature of the COVID-19 restrictions, the parties relationship, and the facts specific to each contract.
Times of uncertainty can be challenging on any business and high-stakes decisions sometimes need to be made rapidly. It is important for businesses to recognize and enforce their contractual rights, responsibilities and potential defenses, especially during a time such as the COVID-19 pandemic. Often, fierce and costly litigation can emerge for the discreet—but crucial—differences such as those described above. It is perhaps even more important for businesses to be represented by attorneys who have extensive experience advising clients regarding their rights and litigating commercial matters in a variety of venues. If you have questions regarding your commercial contracts or your rights and responsibilities thereunder, please feel free to contact SpencePC.
1 Rochester Gas & Elec. Corp. v. Delta Star, Inc., 2009 U.S. Dist. LEXIS 11489 at *19, 68 U.C.C. Rep. Serv. 2d (Callaghan) 130; citing Kel Kim Corp v. Central Markets, 70 N.Y.2d 900, 902-03, 519 N.E.2d 295, 524 N.Y.S.2d 384 (1987) (ruling that non-performance based on a force majeure clause is excusable “only if the force majeure clause specifically includes the event that actually prevents a party’s performance.”); Kyocera Corp. v. Hemlock Semiconductor, LLC, 313 Mich. App. 437, 447 (2015) (ruling force-majeure clauses are typically narrowly construed, such that the clause “will generally only excuse a party’s nonperformance if the event that caused the party’s nonperformance is specifically identified.”).
2 Kyocera Corp. v. Hemlock Semiconductor, LLC, 313 Mich. App. 437, 451-52, (2015); See also Great Lakes Gas Transmission Limited Partnership v. Essar Steel Minn., LLC, 871 F. Supp. 2d 843, 855 (Dist. Minn. 2012); Seaboard Lumber Co v United States, 308 F.3d 1283, 1293 (Fed. Cir. 2002); In re Millers Cove Energy Co, Inc, 62 F3d 155, 158 (CA 6, 1995); Coker Int’l, Inc. v Burlington Industries, Inc., 747 F. Supp. 1168, 1170 (Dist. S.C., 1990); Langham-Hill Petroleum, Inc. v. Southern Fuels Co., 813 F.2d 1327, 1328 (4th Cir. 1987).
3 OWBR LLC v. Clear Channel Communs., Inc., 266 F. Supp. 2d 1214, 1223 (Dist. HI, 2003); citing Butler v. Nepple, 54 Cal. 2d 589 (1960); Stand Energy Corp. v. Cinergy Servs., 144 Ohio App. 3d 410, 417 (2001).
4 Innovative Modular Solutions v. Hazel Crest Sch. Dist. 152.5, 965 N.E.2d 414, 421 (Ill. 2012).