Impact of COVID-19 on Force Majeure Clauses and Related Contract Defenses
The coronavirus (COVID-19) has impacted just about every aspect of our lives. From cancelled vacations to government shutdowns of “non-essential” business establishments, life as we know it has changed drastically as a result of the pandemic. One area of concern for many businesses has been the impact of COVID-19 on contracts. COVID-19-related circumstances, including government shutdown orders, reduced or eliminated demand for products or services, and cancellation of events has caused a flurry of contract breaches across the country, leaving many unanswered questions regarding what, if anything, can be done.
Additionally, with society slowly beginning to reopen, businesses should consider addressing COVID-19-related concerns moving forward in contracts they enter into, including with “force majeure” clauses that specifically address such matters and how the parties will handle them, should they arise in the future. While governments are beginning to relax restrictions on travel, public gatherings and business establishments, uncertainty remains as to what the lasting impact of COVID-19 will be. An understanding of courts’ historic practices in evaluating contracts and force majeure clauses may shed light on best practices moving forward as the wheels of industry begin turning once again, as we return to the “new normal” in a post-COVID-19 world.
The first step to evaluating one’s rights or obligations under an existing contract, or to drafting new rights and obligations in a prospective contract in light of COVID-19should be to evaluate the force majeure clause, if any, preferably with an accompanying review of applicable court cases interpreting such clauses. This article describes some of the key concepts surrounding force majeure and common law defenses to non-performance of a contract obligation, and the implications for parties to such contracts.
Many contracts include a force majeure clause, which excuses a party’s failure to perform that results from certain naturally-occurring or uncontrollable events that render performance difficult or impossible. Unlike general common law defenses, force majeure clauses are generally limited in scope to certain events listed or described in the provision. In general, financial hardship without more is insufficient to establish a defense for non-performance based on force majeure, but depending on your circumstances the force majeure defense may apply to allow for delay or excuse of performance.
The key consideration when drafting and reviewing force majeure clauses is whether the parties intend for the event in question to render performance excusable, usually by listing or describing it in the clause. While force majeure clauses often contain “boiler plate” language with catch-all provisions attempting to cover any unforeseen and/or uncontrollable events that substantially impair a party’s ability to perform, many also include carve-outs limiting the triggering events or types of obligations that can be excused. For example, these carve-outs might provide that payment of rent will not be excused, or viral disease outbreaks or events that are not location-specific, such as COVID-19, are outside of the clause’s scope. To further complicate things, jurisdictions have their own standards for interpreting and enforcing force majeure clauses in contracts.
Because force majeure clauses and their scope and interpretation are typically contract- and jurisdiction-specific, an analysis of the parties’ rights and obligations in light of COVID-19 requires a careful review of the contract in question and the laws of the jurisdiction that governs it. Here is a brief overview of some of the legal concepts for force majeure clauses often considered by the courts in New York, Florida, Delaware, Nevada, and Georgia:
Florida courts narrowly construe force majeure clauses, and generally will only excuse a party’s non-performance if the event in question is specifically listed in the clause. The event need not have been unforeseeable if it was specifically listed, outside of the party’s control, and hindered the party’s performance. Additionally, a force majeure clause generally cannot be invoked in Florida unless the event in question was the sole factor for the non-performance. For example, if a business was unable to deliver goods because of a reduced workforce due to COVID-19, but those goods were also delayed due to an unrelated malfunction of plant equipment used to produce those goods, a force majeure clause may not provide relief to that business for its late delivery, assuming the pandemic was listed but the equipment malfunction was not.
New York courts narrowly construe force majeure clauses, and generally will only excuse a party’s non-performance if the event in question is specifically listed in the clause. In making this determination, New York courts will review whether the event which occurred was of the same character or class as one of those listed in the contract. Catch-all phrases such as “for any other reason” or “other similar events” at the end of the list of force majeure events will not broaden the scope of the force majeure clause, but including language such as “similar or dissimilar events” after a particular event listed has been interpreted to broaden the clause’s meaning for that event. To excuse performance, the event in question must have been unforeseeable, and the non-performing party must have made an effort to perform. For example, if a contract contains a force majeure provision specifically listing COVID-19 as a covered event, the non-performing party should make a good faith effort to perform, including possibly offering an alternative means of performance that are acceptable to the other party. Additionally, if the triggering event was already in existence when the contract was entered (for example, a government shutdown), the event may have been foreseeable and the party may therefore be precluded from asserting a force majeure defense under New York law.
Delaware courts often construe force majeure clauses according to their plain meaning, and whether the event in question must have been unforeseeable for the clause to be invoked therefore depends on the language of the contract at issue. Under Delaware law, catch-all provisions in force majeure clauses typically must be specifically stated, and phrases such as “any reason whatsoever” have been considered sufficient to expand the scope of the clause in question. However, to mitigate the risk of a dispute, the parties should consider specifically delineating COVID-19 and any likely problems it may pose based on their specific circumstances.
Nevada case law is relatively sparse on the issue of interpretation and enforcement of force majeure clauses, but at least one court in Nevada has enforced a force majeure clause for a party’s inability to deliver goods on time caused by a specifically listed event which was beyond the party’s control, in this case a government investigation. Given the current lack of case law in Nevada, parties may consider drafting their force majeure provision with specific events related to COVID-19 in order to reduce the risk of a subsequent contract interpretation dispute.
Georgia courts narrowly construe force majeure clauses, and generally will only excuse a party’s non-performance if the event in question is specifically listed in the clause. Catch-all provisions such as “for any reason whatsoever” have been interpreted to expand the scope of the clause, but catch-all language will not expand the scope to foreseeable events if the event at issue was not specifically set forth in the clause. For example, a force majeure provision listing “COVID-19 and related problems arising therefrom” may be preferable to simply listing “COVID-19” and including a catch-all provision at the end of the clause.
Force Majeure Clauses Moving Forward
Prospective parties to a contract should address the issue of COVID-19 in the particular contract, before an issue arises, and strive to be as specific as possible when doing so. While the myriad of possible issues cannot be accurately predicted, a well-drafted force majeure clause will address the most likely events based on the circumstances of the parties and the transaction, as well as how they will be addressed should they occur.
Parties entitled to performance should consider including a carve-out in the force majeure clause for viral diseases such as COVID-19, providing that performance will not be excused for circumstances related to the same. Alternatively, these parties may consider including carve-outs for specific types of performance, such as payment of rent in a lease agreement, to provide that those forms of performance are not covered by the force majeure clause. In such a contract, while some kinds of performance may be excusable based on COVID-19, those which are most important to the beneficiary of the performance would need to be performed to avoid a breach of the contract.
Parties obligated to perform under a contract, on the other hand, may consider specifically listing COVID-19 and related matters associated with the pandemic as force majeure events, providing relief for good-faith failures to perform due to COVID-19-related circumstances that are beyond their control. For example, if a food caterer is unable to deliver food to an event due to a government restriction imposed in the future, such as in response to a rebound of the pandemic, the caterer would benefit from including such an occurrence in a force majeure clause. This may enable the caterer to arrange an alternative means of providing the food that was ordered, such as by having the customer pick up the order or delivering it to the door rather than setting it up inside the venue, and avoid being in breach of the contract.
Common Law Defenses
If a contract does not contain a force majeure clause covering COVID-19 or related circumstances, parties may need to evaluate the circumstances in question and determine whether the non-performing party is entitled to a defense at common law.
Contract parties may be entitled to delay or excuse of performance based on COVID-19-related circumstances under the common law theories of impossibility, impracticability, or frustration of purpose, which have developed over time from court decisions. Unlike force majeure clauses, in which the parties to a contract deliberately allocate certain risks of unknown events inherent in entering into the transaction, the common law imposes its own allocation of risks when the contract is silent on who bears the risk of what actually took place.
We next provide a brief overview of common law contract doctrines which may be available based on circumstances caused by COVID-19. Keep in mind that the specific requirements and applicability of these doctrines to a particular contract vary by jurisdiction:
Under the doctrine of impossibility of performance, a party’s obligation to perform under a contract is excused when, without any fault of that party, it becomes objectively impossible to perform due to unanticipated circumstances such as COVID-19. An example might be if a supplier is unable to produce goods due to the supplier’s factory burning down in a fire.
To maintain this defense, the non-performing party must show that an unanticipated circumstance has made performance under the contract significantly different from what was reasonably within the contemplation of the parties. However, the inability to perform under a contract solely due to financial reasons will not excuse a performance obligation under the doctrine of impossibility.
The doctrine of impracticability is similar to the doctrine of impossibility, except that the unanticipated circumstances beyond the non-performing party’s control render the performance of a contractual obligation substantially more difficult, complex, or financially burdensome relative to the transaction originally contemplated by the parties to the contract, rather than objectively impossible in general.
Additionally, for impracticability to apply, the changes to the performance obligation must result in an excessive and unreasonable increase in the costs necessary to perform such that performance would be commercially senseless. Impracticability is not available, on the other hand, when the event merely renders performance more expensive than it would have been had the event in question not taken place, but the increase in cost was not excessive or unreasonable.
Frustration of Purpose
Frustration of purpose is a limited excuse to performance that applies when, due to an event beyond the non-performing party’s control, a party’s principal purpose for entering the transaction is negated. Unlike the other common law doctrines described above, for frustration of purpose the performance is not impossible or impracticable, but rather the non-performing party’s reason for entering into the transaction no longer exists. An event that merely renders the transaction unfavorable to the non-performing party in hindsight will not trigger a frustration of purpose defense.
Frustration of purpose typically can excuse performance only if: (i) the non-performing party can no longer accomplish its principal purpose for the transaction, (ii) both parties knew of the non-performing party’s principal purpose for entering the transaction, and (iii) an event beyond the non-performing party’s control caused the frustration of purpose.
As with impracticability, the parties’ contractual relationship becomes materially different because an unexpected or uncontrollable event has substantially altered the nature of the performance obligations. Unlike impossibility, performance remains possible with frustration of purpose, but is excused because the non-performing party would no longer receive its expected benefit under the contract.
Parties to a contract should make reasonable efforts to fulfill their obligations under the contract to the extent they can – given the hardships caused by COVID-19. However, if a party is unable to perform, depending on the circumstances the party faces due to COVID-19, the terms of the contract in question, and the laws of the jurisdiction governing the contract, that party may be entitled to excuse for non-performance under the provisions of the contract or doctrines of common law. As courts begin to hear and rule on contract claims or disputes involving force majeure provisions and COVID-19-based defenses to delayed performance or non-performance, the case law may further evolve to provide parties with greater insight and clarity on whether and which plaintiffs or defendants will be victorious when assertingCOVID-19-related rights and obligations under contracts.
As previously discussed, parties considering entering into contracts moving forward should negotiate and draft the contract with an understanding that the long-term, unpredictable impacts of the COVID-19 pandemic may persist for some time, and may consider including a force majeure clause which specifically addresses these concerns. Additionally, such parties should monitor and analyze forthcoming court decisions in their jurisdiction as such relate to how court’s may in the future interpret force majeure or common law defenses with respect to resolving disputes arising from COVID-19 events. While these measures are not guaranteed to remedy all of the problems posed by the pandemic, they may alleviate the stress and confusion which frequently accompanies contract disputes. A well-drafted force majeure clause that provides an answer before the problem rears its ugly head, or at least a basic understanding of what to expect absent such a clause, could be the difference between an amicable resolution and costly court proceedings.
This article is presented for informational purposes only and does not constitute legal advice or solicitation. The views expressed herein are solely the authors’ and should not be attributed to any other person. While care was taken in the preparation of this article, you should consult a licensed attorney in your jurisdiction based on your specific circumstances with respect to the matters discussed in this article.
David J. Gellen is a shareholder and chair of the corporate department, and Constantine Christakis is an associate in the securities department of Nason, Yeager, Gerson, Harris & Fumero, P.A., with offices in Palm Beach Gardens and Boca Raton, Florida.