Are you one of the many organizations today confronting circumstances you have never faced before due to the coronavirus pandemic? Have you had to delay performing your legal obligations under existing contracts? Or have your contracting partners defaulted on their obligations to you?
What can you do?
While it is too soon to know how courts will decide the inevitable disputes that will come before them, we can examine the legal principles involved and that may provide a road map for future protection.
Force Majeure
A force majeure event is one beyond the control of the parties that prevents performance under a contract and may excuse such non-performance. Typical events have been so-called “acts of God”, such as earthquakes, war, fire, labor strikes, national emergencies, pandemics and other similar acts beyond the control of the parties.
A force majeure event must be specifically provided for in the contract. In common law jurisdiction such as the U.S. and U.K., force majeure is not an implied term; in civil law jurisdictions it generally is an implied term.
Did your contract contain a force majeure clause? Did it state the causes specifically or was it just general in nature? Many courts will look to specific language to determine the parties’ true intention. In a case filed in April 2020 Pacific Collective, which had entered into a contract to acquire real estate from ExxonMobil, sued ExxonMobil claiming that under current circumstances it was impossible to close or to use the real estate for the purposes intended. The contract contained a force majeure clause which listed 18 catastrophes but did not include pandemics1. Given the presumed detailed negotiations between the parties, the court will have to make a factual determination whether the parties meant to be governed by a catch all provision or whether only the 18 specified causes will qualify for force majeure.
Impossibility of Performance
What if your contract did not contain a force majeure clause? Are you out of luck? Not necessarily. There are still defenses available under the common law. In New York the defense of impossibility to perform refers to an inability to perform the contract as required due to intervening events. The doctrine of impossibility applies if the intervening event is not the fault of either party, the event was not foreseen by the parties when they entered into the contract and due to the event it becomes physically or commercially impossible to fulfill the contract.
The doctrine of impossibility results in the contract being terminated. The burden of proof is generally greater than proving force majeure. Therefore, you will have greater difficulty asserting the doctrine at a time when the risks of Covid-19 were anticipated and foreseeable. Also, this doctrine is not available if the contract contained a force majeure clause. And it should be noted that if the impossibility is only temporary, the obligation to perform may be suspended rather than terminated. Mere economic hardship is not sufficient cause to invoke the impossibility doctrine.
Frustration of Purpose
Distinct from the impossibility doctrine, frustration of purpose is another defense of contractual performance. This occurs when an event occurs which materially affects the consideration a party will receive for contractual performance. This doctrine is limited to those rare instances where the frustration of performance was the foundation of the entire contract, for example the purchase of a unique asset that has been destroyed through no fault of the parties and the contract has not dealt with that possibility.
Practical Suggestions for Clients
We recommend that clients consider taking proactive action.
- Review all contracts to determine whether they include a force majeure clause.
- Is the definition of force majeure sufficiently specific to cover Covid-19 and other possible events germane to performance?
- Are there other provisions in the contract which could counter the effect of any force majeure clause, such as mitigation or delayed performance provisions?
- Is notice to the other party required to invoke the doctrine? Ensure that notice is timely and that you have all the supporting required documentation.
- Review insurance policies to determine if coverage is applicable. Generally business interruption policies do not cover pandemics.
- If the contract is one of a chain of contracts consider issuing protective notices to those parties with linked contracts.
- Remember that force majeure may be interpreted differently in different states and countries.
# # #
Whether Covid-19 will provide any of the foregoing defenses to excuse performance of a contract requires a fact specific analysis and an interpretation of existing case law.
Our attorneys are available to provide assistance and to answer your questions.
1 Pacific Collective LLC v. ExxonMobil Oil Corp., Complaint, No. 21 STCV13294 (Cal.Sup.Ct. Files April 3, 2020).