22 Apr Coronavirus Force Majeure Claims Finding Their Way Into the Courthouse
Posted at 11:55h in COVID-19 Updates
It’s Happening – Coronavirus Force Majeure Claims Finding Their Way Into the Courthouse
Brian F. AntweilSenior Counsel
Much has been said (and written) of late about what might excuse or delay a contracting party from having to perform during the COVID-19 pandemic.
According to a recent Wall Street Journal article “Coronavirus Contract Disputes Start Hitting the Courts,” parties are putting the fate of their contractual obligations in the hands of judges and juries. With their backs against the proverbial wall, many businesses are refusing to fulfill contractual obligations (e.g. tenants refusing to pay landlords rent), using often overlooked force majeure clauses as the basis for this avoidance.
Given that most of the country is operating under shelter in place initiatives with a remote workforce, restaurants operating only by takeout, and no retail shopping taking place other than essentials (e.g. grocery stores) and online (e.g. Amazon), the visceral reaction is “of course this completely unprecedented turn of events will excuse performance.” But, in the words of Lee Corso (the famous ESPN College Football Gameday mask-donning cast member ) “not so fast.”
In the case of force majeure, most recent articles written on the subject have correctly concluded that the ability to take refuge in such a provision depends on the specific force majeure language in the contract. In other words, this is not some form of universal contract forgiveness based in equity. The “rubber meets the road” in what the provision says and whether an event can be subsumed into the enumerated force majeure examples in the contract.
So, the issue for the courts will be whether a pandemic or epidemic was a foreseeable event by the contracting parties when the contract was signed. If the force majeure provision specifically mentions pandemic or epidemic, then the likely outcome will be that the contractual obligation falls within the force majeure provision and will be excused in some way or delayed.
But what if there is no mention of pandemic or epidemic? Then, the legal analysis will be whether such an event falls within the enumerated force majeure examples listed in the contract at issue. For example, are these “an act of God,” or a “governmental act or intervention”? Much will depend on how these provisions are written and whether it was foreseeable that these broader examples include a pandemic or epidemic or governmental actions to address them. While force majeure provisions are typically narrowly construed, the outcome will depend on the court’s construction of the provisions. Which state or country’s law applies will also be determinative.
If no force majeure provision exists, all may not be lost. There are many other contract avoidance doctrines that can and will be invoked in these court proceedings to excuse performance. These include impossibility of performance, impracticability, frustration of purpose, and material adverse change, among others. How these doctrines apply here will depend on which state’s law applies to the enforcement and interpretation of these doctrines.
Finally, in the case where the contract is for goods (as opposed to services), Article 2 of the Uniform Commercial Code (UCC) may excuse performance where it is rendered impracticable by either (1) the occurrence of an event “the nonoccurrence of which was a basic assumption on which the contract was made” or (2) good faith compliance with foreign or domestic government regulation. This statutory provision may be viewed as a looser standard than provided in the previously mentioned common law contract avoidance doctrines.
It should also be noted that in some contracts there may be a notice requirement to trigger the force majeure so timeliness may come into play.
The takeaway – while not automatic, this is certainly a situation that calls for making use of and enforcing contract provisions like force majeure as well as common law doctrines, and statutory protections like the UCC.
Litigation over these contract provisions may take years to complete. In the meantime, it should be obvious that as businesses enter into new contracts, they should take care to include pandemics and epidemics among the events that constitute force majeure. While a resolution to the coronavirus pandemic is unclear, what is clear is that this event will not only shape our social behavior but will shape our contracts and contract litigation for years to come.
For more information contact Brian F. Antweil.
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