Until about two months ago, the “force majeure” clause in contracts was merely an often present boilerplate provision which rarely received much attention. COVID-19, and the government-imposed restrictions may have changed all of that, at least for now. A force majeure clause typically empowers the contracting parties to avoid some or all of their obligations under the contract in response to certain unforeseen conditions. Language within force majeure provisions can vary greatly, and few specifically address pandemics or health crises. Most refer more generally to acts of God or other interruptions of business and commerce – for example, labor disputes or strikes, wars, natural disasters, and, more recently, terrorist attacks. Presumably, force majeure clauses going forward will receive more attention in the drafting and negotiation stages, and will likely account for the risks associated with pandemics or similar health crises. The key question for now and for many is whether a force majeure provision might cover the types of impacts created by COVID-19.
1. What to look for and how courts are likely to interpret it.
The analysis of whether a force majeure or similar provision will excuse the nonperformance of a party under a contract is specific to the actual contract language. Courts have established a high bar for employing such provisions to avoid contract obligations. Many jurisdictions require the event be specifically identified. And some even require the event to have been truly unforeseeable at the time of contracting. Force majeure clauses have traditionally applied to unforeseen circumstances – those not previously anticipated by the parties. For example, in the California case of Watson Laboratories, Inc. v. Rhone-Poulenc Rorer, Inc., 178 F Supp.2d 1099, 1110 (2001), the court applied, what it identified as the common law foreseeability requirements, to a force majeure provision which only generally identified the type of event at issue (governmental action). The court refused to apply the force majeure provision to excuse performance because the event at issue was both foreseeable and not specifically encompassed within the force majeure clause. This was true even though the force majeure provision itself did not expressly require unforeseeability.
Generally speaking, courts asked to apply force majeure provisions to the current COVID-19 pandemic will look to whether the relevant clause expressly excused performance for pandemics or governmental regulations, and, if construed narrowly, whether the COVID-19 pandemic was truly unforeseeable under the circumstances at the time of contract. More specifically, courts will likely analyze: (1) whether the current pandemic fits within the defined events set out in the contract; (2) whether the risk due to the pandemic was foreseeable at the time the contract was formed; and (3) whether that risk, or the effects of the pandemic, can or could have been mitigated – in other words, whether performance is truly rendered impossible. As to that last point, even if the pandemic is an event specified in the contract, it may not excuse nonperformance if nonperformance could have been foreseen and mitigated – perhaps that’s the case here based on early predictions and warnings. Also, performance which is rendered merely economically difficult but not impossible may not be excused either. Courts will also look to determine if a party’s nonperformance was caused, in fact, by the event. It’s unclear how concurrent factors might impact that decision. For example, consider how a force majeure provision might apply to a tenant already several months behind on its lease payments, or a contractor who finds itself in the midst of an unrelated labor or materials shortage. Will they be saved by, or at least benefit from, a concurrent or later occurring force majeure event?
In the current COVID-19 pandemic, the unprecedented governmental restrictions on activities might provide the best evidence of per se impact, even in the face of other concurrent factors. Most states have imposed restrictions on travel, movement, and association. Non-essential businesses in the hospitality and service sectors have been ordered to close their doors. But not all businesses are the same. These restrictions have impacted various industries in differing ways. Whether force majeure will excuse nonperformance will likely depend heavily upon the actual performance sought to be excused and the economic sector impacted.
2. There are alternatives to contractual force majeure provisions.
What if a contract doesn’t contain a force majeure provision? Even in the absence of an express force majeure clause, or similar language, contracting parties may be able to escape liability given the unprecedented government action taken in response to COVID-19. While Oregon has not adopted a common law doctrine of force majeure, it has recognized the equitable defense of ‘supervening impossibility and impracticality.’ This defense may apply if a supervening event makes performance impossible or impractical. Supervening impossibility occurs when, after the formation of a contract, an event occurs that a promisor had no reason to anticipate, and for which the promisor is not contributorily at fault, which renders performance of the contract impossible. Wells Fargo Bank, N.A. v. The Ash Organization, 2010 WL 2681675, 4 (2010). If successful, the duty of the promisor is discharged unless a contrary intention has been manifested. Restatement 457 (1932). Similarly, a party may be excused from performance “if the performance of a duty is made impracticable by having to comply with a domestic . . . regulation or order.” Id. (quoting Restatement (Second) of Contracts § 264 (1981)). In considering such defenses, courts will assess whether the event was truly unforeseeable at the time of contract and whether the contract was based on a basic assumption that the governmental regulation would not occur.
Washington recognizes a similar concept in the doctrine of impossibility of performance. Impossibility of performance excuses a party’s performance of a contract and encompasses both strict impossibility and impracticality due to extreme and unreasonable difficulty, expense, injury, or loss. Liner v. Armstrong Homes of Bremerton, Inc., 579 P.2d 367, 370 (1978). Courts have invoked supervening impossibility to exercise equitable discretion in ordering common law contractual rescission.
3. How the courts and parties are seeking to enforce these provisions.
In Oregon, since the COVID-19 pandemic began in full force in March, only one complaint filed in district court has explicitly mentioned nonperformance due to impracticability. This case has since been voluntarily dismissed, so we are unaware how Oregon courts would treat such a complaint. However, plenty of plaintiffs have filed complaints against defendants for nonperformance. It is likely that we will see many defendants attempting to invoke either force majeure clauses or related common law defenses in those matters. A number of complaints filed in federal district courts have attempted to invoke force majeure provisions in Florida, Texas, New York, and Colorado. To date, no federal courts have issued written opinions as to the applicability of these clauses to the COVID-19 crisis.
4. Not just a shield, but also a sword.
Whether and to what degree a force majeure or similar clause is implicated by the COVID-19 crisis is a question of law for the court. Accordingly, it may properly be the subject of a declaratory relief action, seeking an interpretation of the parties’ rights and obligations under the contract. One recently filed case in Oregon is attempting a similar approach. There, the plaintiff is attempting to secure judicial approval to modify certain payment provisions in its contract and to preemptively excuse nonperformance under a discharge by supervening impracticability theory. The plaintiff entered into a contract with defendant to purchase substantially all of defendant’s assets. The sale price was to be paid periodically. The schedule required plaintiff to make a payment toward the sale price on April 1. The plaintiff alleges it won’t be able to perform and has invoked an “act of God” justification. Additionally, the plaintiff alleges that the FCC has requested that it continue to provide service to customers regardless of whether those customers are able to pay promptly. Thus, the plaintiff needs to keep cash on hand to pay employees, but cannot fulfill its contractual duties to defendant due to the massive decrease in incoming cash.
For individuals and businesses facing the inability to meet certain contractual obligations – or those receiving force majeure notices on existing deals – the first step is a careful analysis of the contract terms. However, the existence of a force majeure provision does not necessarily provide an unlimited basis for nonperformance and a party’s due diligence should include a consideration of common law doctrines established to mitigate a party’s inability to perform under the terms of a contract.
The current circumstances are unprecedented and if you have questions about this notice or any other issue currently facing your business during this ongoing crisis, we are here to help you. You can contact Jason Pistacchio, Jake Cormier, or any of our Business Practice Group members at (503) 323-9000. Thank you, stay safe and together we will get through this.