As the international community takes efforts to mitigate the COVID-19 pandemic, business operations and contractual relationships are being significantly impacted. Companies are encouraged to proactively analyze and assess their contractual relationships and operational demands and take steps to mitigate risk. Proactive measures may decrease the likelihood of force majeure disputes and may help in asserting or defending against potential force majeure claims.
In this alert, we consider how force majeure clauses in commercial contracts and the related common law concepts of impossibility or impracticability may be triggered in the context of the current COVID-19 pandemic.
The Force Majeure Clause
“Force majeure” is a legal term of art generally meaning an event or effect that cannot be anticipated or controlled, particularly an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to do.[1] A “force-majeure clause” is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable as a result of an event or effect that the parties could not have anticipated or controlled.[2]
We recommend reviewing critical contracts to determine if they contain a force majeure clause. Whether a particular event constitutes force majeure depends on the specific language included in the clause itself. A force majeure clause typically has two components: (i) a provision excusing one or both parties from performance under the contract (or allowing for contract termination) when a force majeure event occurs and, (ii) a list of events qualifying as force majeure sufficient to trigger the clause. The list of qualifying force majeure events may be unrestricted or finite. An example of a force majeure clause with a finite list of force majeure events is as follows:
Neither party will be liable or responsible to the other party, nor be deemed to have defaulted under or breached this Agreement, for any failure or delay in fulfilling or performing any term of this Agreement [except for any obligations to make payments to the other party hereunder], when and to the extent such failure or delay is caused by or results from the following force majeure events: (a) flood, fire, earthquake, [other potential disaster(s) or catastrophe(s), such as epidemics] or explosion; (b) war (whether war is declared or not), terrorist threats or acts, riot or other civil unrest; (c) government order or law; (d) actions, embargoes or blockades in effect on or after the date of this Agreement; (e) action by any governmental authority; (f) national or regional emergency; [and] (g) strikes, labor stoppages or slowdowns or other industrial disturbances [; and (h) acts of God].
As in the above bracketed language, the clause may not explicitly excuse the obligation to make payments, and epidemics or pandemics may or may not be specifically included as a triggering event. Some clauses may afford additional latitude and include language to the effect that “other similar events beyond the control of the party impacted” may qualify. In addition to including open-ended provisions, the scope of triggering events may be expanded to add “acts of God” in an attempt to cover natural disasters and events not otherwise specifically listed. However, what constitutes an act of God, or what events fall into other catch-all provisions, is often subject to interpretation and a party should not assume that the force majeure clause will include pandemics such as COVID-19. A governmental order mandating closure or otherwise prohibiting a contractual party from performing (such as mandated closure due to pandemic) may also constitute an alternate triggering force majeure event under some contracts.
General Principles on the Applicability of a Force Majeure Clause
Courts may consider several elements when evaluating the applicability of a force majeure clause such as: (1) whether the event qualifies as force majeure under the contract, (2) whether the risk of nonperformance was foreseeable and able to be mitigated, and (3) whether performance is impossible.
Even when a potential force majeure event is expressly included by the relevant clause, the impacted party will generally have the obligation to mitigate any foreseeable risk of nonperformance, and may not be able to invoke force majeure where the potential nonperformance was foreseeable and could have been prevented or otherwise mitigated.[3] For example, the impacted party seeking to avail itself of the force majeure clause may be required to show that performance is impossible “in spite of skill, diligence, and good faith” to continue to perform.[4] Furthermore, depending on the relevant contractual language and governing law, a party may need to establish that performance is truly impossible rather than merely impracticable.[5] While a force majeure provision in a contract may excuse performance for occurrences reasonably beyond the control of the party failing to perform, such a clause may not protect against changes in economic or market conditions that only make it more expensive to perform.[6]
Please be aware that the application of these general principles may differ depending on the specific jurisdiction or contract at issue.
Alternatives to an Express Force Majeure Clause
As businesses and parties review critical contracts to which they are bound during this ongoing COVID-19 pandemic, they should do so with an eye toward provisions excusing performance. They may find, to their dismay or comfort, that key contracts are silent on the issue. Where this is the case, depending on the jurisdiction and contract at issue, nonperformance may potentially be excused under the common law doctrines of impossibility or impracticability.
Under the doctrine of supervening impossibility, nonperformance may sometimes be excused if the subject matter of the contract is no longer capable of being performed due to an unforeseen, supervening act for which the impacted party is not responsible. Similarly, under the related doctrine of impracticability, the duty to perform may be discharged if performance is rendered impracticable without fault of the obligated party and as a result of the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made.[7] Under this view, situations of extreme impracticability of performance (when performance can only be done at an excessive and unreasonable cost) may be deemed to have the same effect as strict impossibility of performance.[8]
Idaho courts have recognized the doctrine of impossibility/impracticability and provide that in order to establish impossibility: “(1) a contingency must occur; (2) performance must be impossible, not just more difficult or more expensive; and (3) the nonoccurrence of the contingency must be a basic assumption of the agreement.” [9]
However, performance is generally only excused under the doctrines of impossibility or impracticability when performance is objectively impossible, meaning the contract is incapable of performance by anyone, not just the party bound.[10] Subjective impossibility that is personal only to the impacted party and is not inherent to the nature of the act to be performed will typically be insufficient to excuse nonperformance under a contract.[11] Additionally, impossibility that is only temporary will not act to discharge a contractual obligation if the contract can yet be performed after the impossibility ceases.[12]
The applicability of these principles hinges heavily on the circumstances of each particular case, and not every jurisdiction recognizes these alternative avenues for relief. However, as noted above, mere market shifts, financial inability to perform, or conditions simply making performance unprofitable may generally be insufficient to excuse nonperformance.
Next Steps
As the COVID-19 pandemic continues, businesses should take proactive steps to assess and stabilize operations. If COVID-19 is impacting contractual obligations, those effected are encouraged to assess the viability of either force majeure or common law principles related to excusing nonperformance. Matters are further complicated as businesses and individuals may find themselves on both sides of the coin—attempting to enforce contractual obligations on one hand (defending against force majeure claims) while seeking to excuse their own contractual obligations on the other (asserting a force majeure defense). Again, these issues are highly fact specific and the legal standards vary state by state. If you are considering triggering a force major clause or need assistance evaluating a claims of force majeure, please contact Adam Christenson and Christopher Cook.
Hawley Troxell stands ready to help our clients navigate these difficult issues as the landscape continues to evolve. Please contact a Hawley Troxell attorney with any questions, we are here to help (even if some of us are teleworking).
This Client Alert has been prepared by Hawley Troxell Ennis & Hawley, LLP for informational purposes only and is not legal advice, a legal opinion or counsel. Readers receiving information through this Client Alert should not act on or rely on it without consulting professional legal counsel. Any such opinions, advice or counsel are dependent upon the application of the law to the particular facts and circumstances of any given situation, and should be given by a licensed attorney in the exercise of his or her professional judgment only after the establishment of an attorney-client relationship and based upon the exercise of the attorney’s professional judgment after consideration of such facts and circumstances. The furnishing of this Client Alert does not constitute or give rise to an attorney client relationship.
[1] Force Majeure, Black’s Law Dictionary (11th ed. 2019).
[2] Force Majeure Clause , Black’s Law Dictionary (11th ed. 2019).
[3] See Richard A. Lord, 30 Williston on Contracts § 77:31 (4th Ed.)
[4] Id.
[5] But see OWBR LLC v. Clear Channel Comms., Inc., 266 F. Supp. 2d 1214, 1216 (D. Haw. 2003) (noting that the express force majeure clause excused nonperformance where performance was “inadvisable”).
[6] See Richard A. Lord, 30 Williston on Contracts § 77:36 (4th Ed.)
[7] See Restatement (Second) of Contracts § 261 (1981); State v. Chacon, 146 Idaho 520 (Ct. App. 2008)
[8] See 17A Am. Jur. 2d Contracts § 643
[9] State v. Chacon, 146 Idaho 520 (Ct. App. 2008); Haessly v. Safeco Title Ins. Co. of Idaho, 121 Idaho 463 (1992); see also Sutheimer v. Stoltenberg, 127 Idaho 81 (Ct. App. 1995).
[10] See 17A Am. Jur. 2d Contracts § 649; State v. Chacon, 146 Idaho 520 (Ct. App. 2008).
[11] Id.
[12] See Restatement (Second) of Contracts § 269 (1981); Sutheimer v. Stoltenberg, 127 Idaho 81 (Ct. App. 1995) (citing Culp v. Tri–County Tractor, Inc., 112 Idaho 894, 900 (Ct. App. 1987)); see also Twin Harbors Lumber Co. v. Carrico, 92 Idaho 343, 348 (1968) (Under the doctrine of impossibility, if the existence of a specific thing is essential for performance, a duty to perform is discharged if the thing “subsequently is not in existence in time for seasonable performance.”)