From boardrooms to stockrooms, companies of all shapes and sizes are grappling with COVID-19. Federal, state and local restrictions on commerce and travel have thrown the business world into disarray, threatening the ability of many companies to satisfy their contractual obligations. While many companies are exploring business solutions and trying to renegotiate existing deals, the legal doctrine of force majeure and the related defenses of impossibility, impracticability and frustration of purpose necessarily have moved to the forefront of many discussions in the commercial sector.
A fundamental understanding of how force majeure functions in the legal world is critical to developing and implementing the correct strategies in the business world. Parties to contracts containing force majeure provisions must ensure that they are adequately availing themselves of the legal protections such provisions provide. Conversely, parties that may be adversely affected by the invocation of force majeure by counterparties need to decide whether to assert legal challenges of their own or to negotiate alternative solutions. And parties to contracts lacking enforceable force majeure provisions must determine what other potentially viable bases may offer some measure of protection, whether from claims of breach, the business interruptions that can result from a counterparty’s nonperformance or both.
What Is Force Majeure?
Translated literally, “force majeure” means “superior force” in French. The legal doctrine of force majeure may be summed up as follows:
If an event or circumstance beyond the reasonable control of the contracting parties renders performance of the contract impossible, nonperformance of the contract will be excused and will not constitute a breach, unless the contract provides otherwise.
While force majeure may seem like a simple concept at first glance, it is anything but.
The application of force majeure is typically a contractual inquiry because many commercial and business contracts contain some form of a force majeure provision. As a result, the application of force majeure often boils down to interpreting the specific language of the contractual provision at issue. Nevertheless, it is possible to gain a general understanding of how force majeure provisions are supposed to work and are likely to be construed.
At its most fundamental level, every contract between two parties is an allocation of a set of risks. Each party makes a promise to perform something in exchange for the other party’s promise to perform something else. By doing so, each party assumes the risk that it will be unable to perform its promise. And if one party cannot perform its promise, the risk of nonperformance will have materialized and that party will be held in breach of the contract—unless a provision in the contract, or some legal statute or doctrine, excuses the nonperformance. That is where force majeure comes into play.
A contractual force majeure provision augments the parties’ basic risk allocation by providing that if something unexpected occurs that neither party caused or could have prevented and that renders performance impossible (or, in some jurisdictions, impracticable), any resulting nonperformance is excused and does not constitute a breach. In other words, the nonperforming party does not bear the risk of nonperformance (and cannot be held liable for breach) if the reason the party cannot perform is the occurrence of a force majeure event.
Is the COVID-19 Pandemic a Force Majeure Event?
Many contractual force majeure provisions enumerate the specific events or circumstances that might excuse a delay or failure of performance. Those events often include such things as acts of war, natural disasters, work stoppages and inclement weather. But many force majeure provisions in commercial contracts do not identify “pandemics” or “public health crises” as specific force majeure events. Is a party to such a provision out of luck if it needs to invoke force majeure in connection with COVID-19?
The answer may depend on whether the operative force majeure provision contains “catch-all” language that covers and encompasses unlisted events or circumstances beyond the parties’ reasonable control that materially prevent performance. If the force majeure provision contains a catch-all, it is possible that the absence of “pandemic,” “public health crisis,” or similar language from the list of expressly enumerated events and circumstances will not preclude a party from invoking force majeure. But some jurisdictions construe force majeure catch-alls narrowly to cover only events and circumstances that are of the same nature as those that are specifically enumerated. So the law governing the contract is key.
By contrast, parties to contracts containing provisions that neither identify pandemics as force majeure events nor contain catch-alls may be foreclosed from asserting force majeure, regardless of the governing law. The reason goes back to the allocation of risk: If two parties have specifically identified a limited list of events or circumstances that could give rise to force majeure, courts may treat that as reflecting the parties’ agreement to limit force majeure only to those events or circumstances. In other words, courts will generally presume that if the parties wanted to list other events or circumstances or to include a catchall in the force majeure provision, they would have done so. That they did not do so reflects their intent to limit the force majeure provision to the specifically identified events and circumstances in the contract.
Lastly, force majeure events that merely make performance unprofitable or more difficult or expensive—as opposed to impossible—typically do not excuse the duty to perform contractual obligations. For example, if a big-box retailer is forced to shutter its stores until the COVID-19 pandemic has subsided and government restrictions have been lifted, is it truly impossible—as opposed to merely burdensome or difficult—for that retailer to continue paying rent on its store leases? Probably not. Under such circumstances, that retailer may not be able to successfully invoke force majeure and runs the risk of being held in breach if it does not pay its rent.
Was COVID-19 Reasonably Foreseeable?
Even with a sufficiently broad force majeure provision containing a catch-all, the question of whether COVID-19 falls within the scope of that provision has no clear answer. The focal point of the analysis is the element of reasonable foreseeability—that is, whether the COVID-19 pandemic was unforeseeable when the contract was executed such that it falls within the scope of the catch-all and can constitute a valid basis for invoking force majeure.
Courts in some jurisdictions have held that a party invoking force majeure, particularly in reliance on a catch-all, is required to prove the element of unforeseeability by demonstrating that the inability to perform is the result of an event or circumstance that was not reasonably foreseeable at the time the contract was executed. The rationale behind this requirement once again boils down to risk: When a particular event or circumstance is reasonably foreseeable such that the parties could have contracted to specify it as a force majeure event, the absence of any express mention of that event indicates that the parties assumed the risk that the event would occur. So if a pandemic is deemed to have been reasonably foreseeable and the operative force majeure provision does not specifically mention pandemics, then the parties may be deemed to have assumed the risk that a pandemic might occur and prevent them from performing. Under such circumstances, failure to perform because of COVID-19 would constitute a breach of the contract, absent application of some other, non-force majeure defense.
The foreseeability inquiry also turns on the type of contract at issue. Under Article 2 of the Uniform Commercial Code, which governs contracts for the sale of goods, the defense of commercial impracticability is available to a seller of goods (but not a buyer) “if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made.” Thus, a seller who does not negotiate the inclusion of contractual language excusing nonperformance resulting from a reasonably foreseeable event will be deemed to have assumed the risk of the event’s occurrence, cannot rely on a defense of commercial impracticability, and will be in breach of the contract in the event of nonperformance.
Additionally, it is important to understand that how a party frames a force majeure event, and how a court might interpret that event, are significant inquiries. For instance, was the force majeure event the pandemic caused by COVID-19? Or was it the subsequent mandatory lockdowns imposed by governments that precluded so many aspects of our daily lives? Or was it perhaps the market crash that occurred shortly after the federal government declared a national state of emergency? The answers to these questions, and how a party addresses them, may affect whether that party can successfully invoke force majeure.
At a fundamental level, it is safe to assume that a party seeking to invoke force majeure because of COVID-19 will be able to establish that the disease is the root cause of invoking force majeure, and that the novel coronavirus was not within its reasonable control. But framing the force majeure event as the COVID-19 pandemic is a dangerous game if a party seeking relief from performance is relying on catch-all language or otherwise has to prove unforeseeability. On the one hand, COVID-19 seemingly came out of nowhere and disrupted every aspect of business and society in ways that, for many of us, were unimaginable or unexpected. On the other hand, scientists and experts have been predicting a major pandemic for years. And recent epidemics such as SARS, MERS and Ebola have only bolstered the possibility of a major contagion spreading throughout the world and wreaking havoc. Under these circumstances, was the COVID-19 pandemic really unforeseeable such that contracting parties could not have contracted to expressly enumerate such an event in their force majeure provisions? This question has no easy answer and reflects that the issue of foreseeability will be at the center of the forthcoming wave of COVID-19-related force majeure disputes.
The foreseeability inquiry is further complicated by the fact that market fluctuations are typically considered to be reasonably foreseeable and part of the allocation of risk between two contracting parties. Thus, a market crash that substantially affects a party’s ability to perform ordinarily will not give rise to force majeure. Again, this is why framing matters. A party seeking to hold a nonperforming party liable for breach may contend that market fluctuations are always reasonably foreseeable, whether caused by a pandemic, a war, or some other event or circumstance, and thus cannot be used to excuse nonperformance.
Additionally, in some industries, phenomena not directly tied to COVID-19 have caused market fluctuations that have exacerbated the problems flowing from the pandemic. For example, in the oil and gas industry, the price of crude oil dropped significantly in early March because of a price war initiated by Saudi Arabia, and subsequently dropped to historic lows in April because of a collapse in demand. These factors could present major hurdles to oil and gas companies such as crude oil producers seeking to connect the decrease in oil prices to COVID-19 for purposes of invoking force majeure. Thus, a party’s ability to effectively frame the force majeure event so that it can be in the best legal position in the event of future litigation is of paramount importance.
What if a Contract Does Not Contain a Force Majeure Provision?
All is not lost if a contract does not contain a force majeure provision (or if that provision is not enforceable for some reason). At least one jurisdiction—California—has enacted a force majeure statute codifying several grounds for seeking force majeure even absent a contractual force majeure provision. Thus, parties to a contract governed by California law may be able to invoke statutory force majeure, even if their contract does not contain a force majeure provision. To rely on the statute, a party must show that its performance has been prevented or delayed 1) “by operation of law, even though there may have been a stipulation that this shall not be an excuse,” or 2) “by an irresistible, superhuman cause…unless the parties have expressly agreed to the contrary.” For parties grappling with the fallout of COVID-19, this statute could serve as a lifeline in contracts governed by California law.
The question of whether COVID-19 falls within the parameters of California’s statutory force majeure provision is sure to be litigated in the near future. Certainly, one can expect businesses to argue that the many restrictions on commerce and large-group gatherings implemented at the federal, state and local levels in recent months have prevented or delayed performance “by operation of law.”
What are Some Additional Defenses or Arguments to Consider?
Parties seeking excuses for nonperformance that cannot rely on contractual or statutory force majeure provisions might consider the related common law defenses of impossibility, impracticability and frustration of purpose. The key thing to remember about these defenses is that each of them generally requires a showing of reasonable foreseeability. If an event or circumstance was reasonably foreseeable at the time of the contract, the parties will be deemed to have assumed the risk of those events or circumstances occurring and will not be able to rely on these defenses.
While impossibility (and in some jurisdictions, impracticability) is essentially the common law equivalent of contractual force majeure catch-alls, the frustration of purpose doctrine extends further. Frustration of purpose does not require a showing of impossibility, but rather proof that an unforeseeable, supervening event has so completely and fundamentally destroyed the value of the performance of the contract for one of the parties that the party is legally excused from any further performance. This is a high bar; many courts that have adjudicated frustration of purpose arguments have held that the doctrine did not apply, either because the event or circumstance allegedly giving rise to the defense was foreseeable or because the value of performing the contract was not sufficiently destroyed. Nevertheless, frustration of purpose may be a potentially viable defense for some contracting parties that are unable to rely on a contractual or statutory force majeure provision or the common law defenses of impossibility and impracticability.
Additionally, many force majeure provisions contain procedural and timing requirements that, if not followed faithfully, may result in waiver of the right of force majeure. Thus, it is imperative that a nonperforming party understand its specific contractual obligations with respect to invoking force majeure. Providing adequate and timely notice of a force majeure event does not just help ensure compliance with procedures set forth in the contract—it also places the other party on notice of its duty to mitigate damages—a duty that virtually every jurisdiction recognizes. Thus, the sooner the nonperforming party invoking force majeure places the counterparty on notice, the sooner that counterparty will have to start mitigating its damages or run the risk of having its damages claim reduced in subsequent litigation.
COVID-19 has turned the business world upside down. The issues and considerations relating to contractual nonperformance are numerous and complex. For parties seeking to invoke, or to oppose the invocation of, defensive doctrines such as force majeure and frustration of purpose, gaining a thorough and foundational understanding of how these concepts might apply to a particular set of circumstances is essential to ensuring adequate protection and enforcement of rights.