COVID-19 Legal Update: Force MajeurePDF
The coronavirus pandemic has impacted the ability of numerous companies to perform contractual obligations. Parties to a contract should be aware, however, that, with limited exceptions, contract law does not allocate risks, liability and losses based on principles of fairness or reasonableness. Instead, courts review the specific language of the contract and, in certain instances, apply the legal principles of "impossibility" and "impracticability" to determine whether to excuse or permit delayed performance. No hard and fast rules can be applied, and every situation in which the pandemic has impacted performance typically requires individualized analysis, with attention to the following considerations.
With limited exceptions (for federal procurement contracts and other contracts directly affected by specific federal laws), state law controls — and applicable law varies materially from state to state. Determining which state's law applies can be complex, particularly if the contract has no choice of law provision. In certain instances, the location where any lawsuit is filed can determine which state's law applies because courts employ different choice of law rules from state to state.
Many contracts contain a "force majeure" provision. These provisions typically excuse or permit a delay in performance upon the occurrence of specific enumerated events and in some instances also include a general reference to "other events beyond the control of the parties," or words to that effect. Some force majeure provisions will require notice of the force majeure event impacting performance. And issues can arise about whether and to what extent the event at issue actually impacts performance.
In interpreting and applying force majeure clauses, some courts:
- Require strict compliance with notice requirements before a party can invoke the force majeure clause. Even if notice is not required, careful and accurate communication with appropriate attention to legal concerns is important for a contract party to preserve its legal options.
- Strictly interpret the clause — and refuse to excuse performance (even if performance is literally impossible) if the event giving rise to the force majeure is not specifically listed. (Some force majeure clauses specifically mention epidemics and/or national emergencies; others do not.) These courts may also interpret general references to "other events beyond the control of the parties" more narrowly than might have been anticipated by the parties. For example, a leading New York case held that a general reference to "other similar causes" would excuse performance only if the event impacting performance was of the "same kind or nature as the particular matters mentioned." Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900 (1987).
- Require that the event impacting performance be unforeseen or unforeseeable before performance will be excused.
- Will not apply the principles of "impossibility" or "impracticability" of performance if the parties have included a force majeure clause in their agreement, typically reasoning that the parties have contractually allocated the risks and that a court should not interfere with their agreed-upon allocation.
In each of these situations, other courts take a more flexible approach when deciding whether to excuse or permit delayed performance. Thus, which state's law applies can be determinative.
When a contract does not include a force majeure clause (or in some instances, even if it does), the doctrines of impossibility and impracticability may be applicable. One of these doctrines may apply when the parties assumed that an event would not occur and the occurrence of the event has made performance impossible or impracticable. In some states, courts interpret these doctrines strictly, excusing or permitting delays in performance only when performance would truly be impossible. Other states are more lenient, and in some instances will consider the economic costs of performance under unexpected adverse market conditions.
When a force majeure clause or the doctrines of impossibility or impracticability apply, both parties to a contract are excused from performance (i.e., neither party is liable for breach of the contract). The result can differ, however, when a contract has been partly performed before the event at issue occurs, or when the contract specifically requires a party to continue to perform certain obligations even after a force majeure event.
Temporal considerations also come into play, with issues arising as to whether performance is wholly excused or simply delayed — and if simply delayed, when and under what circumstances a party must recommence performance. A contract may provide one or both parties an option to terminate if performance cannot be recommenced within a certain time period.
Finally, business interruption insurance may (or may not) be available when the coronavirus pandemic impacts performance of a contract — and the availability of such insurance should also be considered when determining how to proceed.