The unprecedented spread of the novel coronavirus leading to the World Health Organization categorizing COVID-19 as a global pandemic on March 11, 2020[1] continues to raise grave concerns over global health and the global economy. Businesses are forced to shut down, employees are mandated to work remotely, schools are closed, and travel bans, closed borders, quarantines, curfews, and shelter-in-place orders are in effect representing just a few examples of the extreme measures presently instituted to curtail and slow the rampant spread of the virus.
These critical containment tactics are creating detrimental market volatilities and leaving companies with many questions regarding their business operations and economic futures. In the wake of this global pandemic, many companies’ ability to fulfill contractual obligations are frustrated by supply chain management issues, mandates to close offices and facilities, requirements to cut workforces, and the prohibition of travel or transport of goods across interstate or international borders. In such extreme and unexpected circumstances, contractual force majeure (French for “superior force”) clauses – often overlooked during contract drafting and negotiation, and rarely relevant during contract performance – may serve to excuse or delay a party’s contractual obligations under certain circumstances. Force majeure provisions, however, do not provide a one size fits all definitive defense for failure to perform. Whether a force majeure clause may be triggered by the COVID-19 pandemic requires a case by case, fact-intensive inquiry centered around a thorough study of the contract at issue and controlling law that governs the contract.
Force Majeure Clauses
A force majeure clause is a commonly used contractual provision that excuses performance if an extraordinary, unforeseeable, and unavoidable event prevents one or both parties from meeting their obligations as set forth in the contract. “The primary purpose of a force majeure clause is to ‘relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated.’”[2] A force majeure event, however, cannot reflect a “[m]ere impracticality or unanticipated difficulty.”[3] Under New York law, what specifically constitutes a qualifying force majeure event largely depends on the express language found in the contractual provision and the contract as a whole.
Force Majeure Events
Force majeure provisions are narrowly construed by New York courts and are typically limited to those contingencies specifically listed in the actual language of the contract or to similar events.[4] Although many force majeure clauses likely do not expressly list “pandemics,” “epidemics” or “quarantines” as triggering contingencies, the current COVID-19 pandemic may fall under language such as, “acts of God,” “government action,” “government order,” or a catchall such as “other similar circumstances beyond the control of the parties.” “The principle of interpretation applicable to [force majeure] clauses is that the general words are not to be given expansive meaning; they are confined to things of the same kind or nature as the particular matters mentioned.”[5]
While case law exists concerning the categorization of certain natural disasters as “acts of God,” whether a global pandemic such as COVID-19 constitutes an “act of God” is uncharted territory. See, e.g., Rexing Quality Eggs v. Rembrandt Enters., 360 F. Supp. 3d 817, 841-42 (S.D. Ind. 2018) (finding that a drop in market demand as it related to a cage-free egg purchase agreement did not constitute an unforeseeable force majeure event, “[u]nlike the avian flu example, which may plausibly constitute an unforeseeable event precipitating a dramatic change in market conditions, a change in purchaser demand—even a substantial change—is a foreseeable part of doing business.”) (emphasis added).
Mitigation and Notice
It is also important to note that many force majeure provisions require diligent efforts to mitigate the effects of a force majeure event. This means that even if a party to a contract intends to invoke a force majeure provision, the party must also act diligently to mitigate any damages associated with the force majeure event and resultant failure to perform its obligations pursuant to the contract. Reasonable measures to mitigate will vary depending on the subject matter of the contract but may include providing suitable substitutes or acquiring alternative supply sources.
Similarly, force majeure provisions frequently include strict notice obligations, requiring a party seeking to rely on the provision to excuse its inability or delay in meeting its contractual duties, to provide prompt notice. See, e.g., SNB Farms, Inc. v. Swift & Co., Nos. C01-2077, C01-2078, C01-2080, 2003 U.S. Dist. LEXIS 2063 (N.D. Iowa Feb. 7, 2003) – a case involving a contractual dispute regarding hog purchase agreements. In SNB Farms, the hog sellers sought to rely on a force majeure clause to excuse their failure to perform. Specifically, the sellers claimed that as a result of an outbreak of Porcine Reproduction and Respiratory Syndrome (PPRS), they encountered unforeseen hog production problems leading to their inability to meet their supply obligations. The court, however, precluded the sellers from relying on the force majeure provision to excuse their breach because they failed to comply with the provision’s notice requirements.
Frustration of Purpose and Impossibility to Perform
For contracts without a force majeure provision, the common law doctrines of frustration of purpose and impossibility may excuse performance in light of the COVID-19 pandemic. Critical to both doctrines is the event’s unforeseeable nature. “[T]he impossibility [of performance] must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract. Frustration of purpose excuses performance when a ‘virtually cataclysmic, wholly unforeseeable event renders the contract valueless to one party.’”[6] Again, the applicability of either of these common law doctrines under the current COVID-19 pandemic circumstances would require a case by case analysis of the specific contract at issue and the applicable contract law.
Practical Considerations
Companies struggling to meet their contractual obligations given the COVID-19 pandemic, as well as those who anticipate that their contracting partners (e.g., suppliers, purchasers, lessees, etc.) may be facing difficulties in connection with their duties, should carefully review their contracts and any applicable force majeure clauses. For example, does the force majeure clause specifically include reference to an inability to perform or excusable delay caused by disease, quarantine, or health crisis? Does the provision entitle the counterparty to the contract to some equitable adjustment (e.g., contract price or time to perform)? Does the provision contemplate a reasonable time for delaying performance? How and when is notice required to be provided?
Pearl Cohen’s team is well-versed and experienced in contract law and is here to advise you and answer any questions that you may have regarding your contracts, including force majeure clauses, during this global pandemic.
[1] https://www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-they-happen.
[2] Beardslee v. Inflection Energy, LLC, 904 F. Supp. 2d 213, 220 (N.D.N.Y. 2012) (aff’d. by Beardslee, 2015 U.S. App. LEXIS 14516 (2d Cir. N.Y., Aug. 19, 2015)) (quoting Phillips Puerto Rico Core, Inc. v. Tradax Petroleum, Ltd., 782 F.2d 314, 319 (2d Cir. 1985)).
[3] Id. at 220 (quoting Phibro Energy, Inc. v. Empresa de Polimeros de Sines Sarl, 720 F. Supp. 312, 318 (S.D.N.Y. 1989)).
[4] Wuhan Airlines v. Air Alaska, Inc., 97 Civ. 8924 (JSR), 1998 U.S. Dist. LEXIS 15529, at *7 (S.D.N.Y. Oct. 1, 1998) (citing Kel Kim Corporation v. Central Markets, 70 N.Y.2d 900, 902, 524 N.Y.S.2d 384, 385, 519 N.E.2d 295 (1987)).
[5] Kel Kim Corp., 70 N.Y.2d at 903.
[6] Beardslee, 904 F. Supp. 2d at 221 (internal citations omitted).
