April 8, 2020
By: W. Bradley Hunt
Countless contracts – for the sale of all kinds of goods and services – contain “force majeure” clauses. “Force majeure” – literally “superior force,” sometimes called an “act of God” – is an event beyond the control of the parties that prevents performance of a contract. Many contracts contain force majeure clauses providing that, should certain events occur, performance is at least partly excused.
Ninety-nine percent of the time, these clauses go unnoticed and have no effect. But these are not ordinary times. During the coronavirus pandemic, all over America people and businesses are invoking force majeure clauses as an excuse for failing to perform contracts, on the basis that the pandemic and the related shutdown measures make it difficult or impossible to comply with a contract.
If you are considering invoking a force majeure clause, or your contractual counterpart is invoking one against you, what are the key considerations?
First, specific contract language matters. Not all force majeure clauses are the same. Contracts often list particular events that qualify as “force majeure.” Some contracts list “epidemics” or “pandemics”; others do not. While this does not necessarily conclude the analysis – since there are other factors and since a contract may contain general language sufficient to cover epidemics without mentioning them by name – inclusion of “epidemics” or “pandemics” in a force majeure clause clearly makes it more likely that the clause will apply to the current situation. See Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902-903 (1987) (“Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused.”). And a contract may specify whether a force majeure event justifies total nonperformance of contractual duties – or only limited, partial nonperformance.
Second, developments in the law will matter. The law will develop because this issue will be litigated – and numerous lawsuits will specifically address the relationship between the coronavirus pandemic and force majeure clauses. At the current time, civil litigation is largely shut down due to the pandemic, so it will take some time before court decisions emerge. But when the decisions emerge, it will be critical to monitor developments in the law.
Third, governmental orders can matter. Specific contract language may address whether governmental orders constitute force majeure. In addition, even where a contract does not have a force majeure clause, statutes and executive orders enacted in response to the coronavirus pandemic may excuse contractual performance in some circumstances. For example, the federal coronavirus stimulus law (the Americans in the Coronavirus Aid, Relief and Economic Security Act or the CARES Act) provides certain mortgage payment relief.
Fourth, even where a contract lacks a force majeure clause, the law will excuse contractual performance in certain circumstances involving events outside the control of the parties. Notably, in New York, an uncontrollable event will excuse contractual performance only if it makes performance truly impossible – not if it merely makes performance financially difficult or impractical. See Kel Kim Corp., 70 N.Y.2d at 902 (1987) (“once a party to a contract has made a promise, that party must perform or respond in damages for its failure, even when unforeseen circumstances make performance burdensome.”). But in other states, such as California, even mere “impracticability” can in some limited cases excuse nonperformance. See City of Vernon v. City of Los Angeles, 45 Cal.2d 710, 717, 290 P.2d 841 (1955) (impracticability can excuse performance where there is “excessive and unreasonable expense”).
Fifth and finally, no matter what your contract says and what the law provides, it is worth considering whether you can negotiate an agreement with your contract counterpart to address the difficulties that so many businesses and individuals are experiencing at this time – such as an agreement that allows for partial performance on a temporary basis until the crisis abates. In the current pandemic, often where one party to a contract is struggling to perform, the other party is struggling also, so an agreement may benefit both sides. Furthermore, reaching an agreement can avoid the time and expense of litigation. And if your case does end up in litigation, courts may look favorably on parties that were willing to compromise and to help one another during this difficult time.