April 6, 2020
About a month ago, I headed to work in the morning to meet clients at my office. Introducing myself, I shake their hand. I might meet up with colleagues over lunch at a local eatery. Then, I spend an afternoon sitting side-by-side with my client in the courtroom.
On my way home from work, I might swing into the local grocery store to pick up cleaning products, or other household necessities like toilet paper. I spend the evening cooking dinner with my family. I enjoy the comforts of home, free to leave whenever I want. Then, I blinked.
In just a matter of days, COVID-19 became a pandemic. Governments imposed unprecedented travel restrictions. The idea of five people became a large group. Social distancing became a lifestyle. State and local governments instated restrictive interventions.
Schools, restaurants, and courthouses closed. All of a sudden, companies and organizations from various sectors experienced severe business interruptions. This led to changes or the cancellation of certain obligations.
The fast-paced evolution of the virus and our hectic response to adapt gives rise to new events every day. These affect a party’s ability to excuse contractual nonperformance through force majeure or other mechanisms.
What is a force majeure?
Force majeure clauses are contract provisions that relieve a party from penalties for breach of contract when circumstances beyond the party’s control. “Acts of God” or other extraordinary events, render performance untenable or impossible. As an example, suppose you agree to purchase a home.
Both you and the seller agree on the terms of sale, including the price and date of closing. The purchase and sale agreement contains a force majeure clause. The day before closing, lightning strikes the home and burns it to the ground.
We would all agree that it would be unfair to require you to purchase the home when it no longer exists. Fortunately, that force majeure clause in the agreement excuses your performance. You are not obligated to pay for the home or what is left of it.
These clauses currently gain attention due to COVID-19. The coming weeks and months bring many assertions of force majeure in response to quarantines, business closures, and travel restrictions. Whether such assertions of successful force majeure depends heavily on the facts relevant to the particular contracts at issue.
Principals of Force Majeure
Although not yet addressed in Maine, Courts in other jurisdictions tend to look to several elements when considering the applicability of a force majeure clause.
These include whether:
- An event qualifies as a force majeure under the contract.
- The risk of nonperformance was foreseeable and able to be mitigated.
- Performance is truly impossible.
Force majeure clauses are generally interpreted narrowly. Therefore, for an event to qualify as force majeure it must be outlined in the clause at issue. See Footnote 1 below. When a potential force majeure event encompasses the relevant clause, however, a party must mitigate any foreseeable risk of nonperformance.
They cannot invoke force majeure where the potential nonperformance was foreseeable and could have been prevented or otherwise mitigated. See Footnote 2 below. Depending on the relevant contractual language, a party generally must establish that performance as truly impossible rather than merely impracticable.
See Footnote 3 below. That means that nonperformance will not necessarily be excused simply because it is financially or economically more difficult to satisfy contractual obligations. Companies should closely scrutinize the language of their force majeure clauses when considering their obligations and potential nonperformance risks.
What if my contract doesn’t have a force majeure clause?
If you currently struggle to perform your obligations under a contract, take proactive steps. Contact our office immediately to discuss your options. As the impact of COVID-19 magnifies, parties increasingly struggle to compensate for the economic deficiencies.
While courts cannot enforce a force majeure clause that does not exist, there are still some common law doctrines such as impossibility or impracticability that may excuse performance. Typically, these doctrines excuse nonperformance.
A party establishes that:
- An unexpected intervening event occurred
- The parties’ agreement assumed such an event would not occur
- An unexpected event made contractual performance impossible or impracticable
See Footnote 4 below. Much like force majeure clauses, courts scrutinize whether or not the event preventing performance was foreseeable at the time of the contract’s execution. Considering whether the nonoccurrence of the event at issue was a basic assumption on which the contract was made. See Footnote 5 below.
Another classic alternative in the absence of a force majeure clause is the doctrine of frustration of purpose. Similar to impracticability and impossibility, the frustration of purpose focuses on whether the event at issue obviated the purpose of the contract, rather than made the party’s performance “impossible.”
Consider, has the unforeseeable event significantly altered the circumstances of the agreement such that performance no longer fulfills any aspect of its original purpose? Again, here, expect courts to analyze the “purpose” of the contract and whether it has been completely frustrated.
What else can you do to protect yourself?
Due to the risks that COVID-19 poses to ongoing business operations for the foreseeable future, companies should proactively consider the potential impacts this global pandemic could make on their operations. They should begin to take steps to mitigate their operational risk.
Assess the availability of insurance coverage in the event that risk materializes. Businesses should also begin talking with their legal counsel at Rudman Winchell and local banks about their options stemming from the two trillion-dollar stimulus package recently passed by Congress.
Taking these proactive measures decreases the likelihood of force majeure disputes in the future. It also helps any party asserting a claim of force majeure to establish that it took reasonable steps to avoid contractual interruption.
Footnotes
[1] See, e.g., In re Cablevision Consumer Litigation, 864 F.Supp.2d 258, 264 (E.D.N.Y., 2012) Holding that force majeure clauses are typically narrowly construed. The clause excuses nonperformance “if the event that caused the party’s nonperformance is specifically identified.”
Cf., Watson Labs., Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099, 1113 (C.D. Cal. 2001) Finding the language referring to “regulatory, government action” is vague and boilerplate. Thus, denying the Defendants’ defense of force majeure.
[2] See, Gulf Oil Corp. v. Federal Energy Regulatory Com. (1983, CA3) 706 F.2d 444, cert den 464 US 103, 79 L.Ed 2d 16, 104 S.Ct. 698, later proceeding on attorneys’ fees (CA3) 743 F.2d 166.
[3] See, Cablevision, supra, at 264. Noting that, under New York Law, force majeure clauses generally only excuse a party’s performance rendered impossible by an unforeseen event.”
[4] Melvin A. Eisenberg, Impossibility, Impracticability, and Frustration, 1 J. Legal Analysis 207, 209 (2009)
[5] Melvin A. Eisenberg, Impossibility, Impracticability, and Frustration, 1 J. Legal Analysis 207, 211 (2009)
This information is accurate as of April 6, 2020. It is subject to change based on any new legislation.
Michael Hockenbury, Esq
Rudman Winchell
207-947-4501