COVID-19: The Force Majeure of Coronavirus

COVID-19: The Force Majeure of Coronavirus

The Coronavirus disease 2019 (COVID-19) pandemic has created unprecedented upheaval in the American way of life.  Widespread business and school closures, shelter in place orders and travel restrictions have disrupted the personal and commercial lives of millions.  Uncertainty abounds and our clients must move forward and determine how to react when such public health restrictions impact or even prohibit the performance of material contractual obligations, either their obligations or that of an important partner.  Many contracts contain Force Majeure provisions that deal with unforeseen events such as the coronavirus pandemic and the California Civil Code may also excuse a party from an agreement if performance has been prevented or delayed by operation of law or by an irresistible, superhuman cause.  A court may also excuse contractual performance under a Frustration of Purpose defense if a supervening event renders such performance essentially pointless.  This paper will analyze these doctrines in the context of the coronavirus pandemic and provide practical guidance to those navigating these issues in such an unsettled time.

Force Majeure

The basis of contract law is that if two parties agree to a transaction then each is obliged to perform as agreed to.  If either party fails to perform, either intentionally or otherwise, the other party may sue and recover the “benefit of the bargain” to include expected profits and expenses to make them whole as if the other party had performed as agreed.  Force Majeure is the concept that if a significant and unforeseen event intervenes and makes it impossible or manifestly impractical for a party to perform its contractual obligations, then on a principal of fairness they will be excused from performance and will not be fully liable to the other party for breaching the agreement.

Force Majeure means “Superior Force” in French and since the concept developed under French Civil Law and not English Common Law, parties must specifically add a Force Majeure provision to their contract in order for this doctrine to apply to their agreement.  Here is an example of a basic Force Majeure provision:

Force Majeure or Uncontrollable Event.  Failure of either party to perform under this Agreement shall not subject such party to any liability to the other if such failure is caused by acts such as, but not limited to, acts of God, fire, explosion, flood, drought, war, riot, sabotage, embargo, strikes or other labor trouble, compliance with any order or regulation of any government entity, or by any cause beyond the reasonable control of the parties.

Plainly the coronavirus pandemic qualifies as an act of God and a cause beyond the reasonable control of the parties and the many public health restrictions on gathering and travel qualify as orders from a government entity.  Therefore, a party to an agreement with such a Force Majeure provision who fails to fully perform because of the coronavirus pandemic will have a strong argument that their performance is excused and the other party is not entitled to collect damages for the full benefit of their bargain as would be the case in the event of an unexcused breach of the Agreement.

California Civil Code §1511

With or without a Force Majeure provision, a party struggling to meet its contractual obligations due to a material unforeseen event may also find relief under state law.  For example, Section 1511 of the California Civil Code provides:

The want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate:

1. When such performance or offer is prevented or delayed by the act of the creditor, or by the operation of law, even though there may have been a stipulation that this shall not be an excuse;  however, the parties may expressly require in a contract that the party relying on the provisions of this paragraph give written notice to the other party or parties, within a reasonable time after the occurrence of the event excusing performance, of an intention to claim an extension of time or of an intention to bring suit or of any other similar or related intent, provided the requirement of such notice is reasonable and just;*

2. When it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary;  or,*

3. When the debtor is induced not to make it, by any act of the creditor intended or naturally tending to have that effect, done at or before the time at which such performance or offer may be made, and not rescinded before that time.

The coronavirus pandemic clearly meets the standard of an “irresistible, superhuman cause” and the many public health restrictions on gathering and travel certainly represent the “operation of law” as contemplated by Cal. Civ. Code §1511.  Therefore, a party who fails to fully perform under an agreement governed by California law due to the coronavirus pandemic will have a strong argument that their performance is excused and the other party is not entitled to collect damages for the full benefit of their bargain.

Note that the “operation of law” excuse from performance requires prompt notice to the other side and the parties cannot contractually agree to waive this defense.  The “irresistible, superhuman cause” excuse requires no such notice but the parties can agree to waive this defense.  Any such waiver would likely be found in the Force Majeure or Uncontrollable Events provision of an agreement but technically could be placed anywhere.  Given the unprecedented scale of the coronavirus pandemic and the powerful government actions in response, both excuses from performance are likely available under California law to a party struggling to meet material contract obligations as a result.

Proper Notice

Many Force Majeure clauses and related state statutes require prompt notice of the circumstances that may excuse a party from meeting its contractual obligations to another party.  In some cases there is a specified notice window after which a Force Majeure event cannot be claimed.  Such notice provisions must be complied with when required but care should be taken when drafting such a notice so that it does not constitute an anticipatory breach of the contract.  Anticipatory breach occurs when one party directly informs the other party that it will not fulfill its agreed to obligations.  Such a direct repudiation of a contract allows the other party to declare a breach and to immediately suspend their performance under the agreement and sue for full damages.  This result is quite the opposite of an excuse from performance for the breaching party and it is much better to notify the other party of the specific facts and circumstances of the Force Majeure event and the potential and possible impacts that may have on the party struggling to meet its contractual obligations.  Given the significant risk of a bad outcome in the event of an anticipatory breach, we strongly encourage you to seek legal counsel to prepare or review any notice of a Force Majeure event before it is delivered to the other party.

Frustration of Purpose

Related to Force Majeure provisions and state statues that excuse a party from contractual obligations if an unforeseen event makes performance impossible or manifestly impractical, the Frustration of Purpose doctrine may excuse a party from performance if the principal purpose of the contract has been substantially frustrated and it is now essentially pointless for the parties to continue as agreed to.  For example, although a television network can still run an ad of an Olympic sponsor this summer, the essential purpose of their advertising agreement (connecting an advertiser to a worldwide Olympic audience) has been substantially frustrated since Japan has postponed the 2020 Summer Olympics for at least a year.  Although performance under the original agreement remains entirely possible, the sponsor has a strong argument that the essential purpose of the transaction has been frustrated, delayed or perhaps canceled altogether and therefor the original agreement is longer enforceable by the network and the sponsor will not have to pay an Olympic size price to run an ad on what will now be a regular media day with a regular size audience.

Drafting Guide

When forming an agreement with another party it is important to consider your preferred outcome in the event of an unforeseen Force Majeure event.  Are you the seller of goods and services and thus carry most of the weight of future obligations or are you the customer and have only to make payment upon receipt?  How important is it that the other party delivers their goods or services to you in the timely manner?  Do you expect the other party will look for an excuse if they cannot meet their commitments?  How significant will your loss be if the other side fails to perform?  Answers to these questions and more will guide how you and your attorney will craft the agreement.

Force Majeure Provision – Pro Party with most Future Obligations.  If you are the party principally responsible for the future delivery of goods or services, then in most cases you will want to add a broad and inclusive Force Majeure provision to your agreement such as:

Force Majeure and Uncontrollable Events.  Except for the payment of money for goods delivered or services rendered, neither party will be liable for any interruption, delay or failure to perform any obligation under this agreement when such interruption, delay or failure results from causes beyond such party’s reasonable control, including any law or act of any governmental authority, war, riot, terrorism, insurrection or other hostilities, embargo, fuel or energy shortage, equipment breakdowns, power failure, pandemic, epidemic, fire, mass casualty event, flood, earthquake, act of God, strikes, lockouts, labor shortages, failure of a third party to satisfy its contractual obligations, or any other similar cause.

Excusable Delay Provision – Pro Party most dependent on Performance of Other Party.  If you are depending upon the future performance of the other party more than they are depending on you then you want a narrow Excusable Delay provision that allows for only a delay and not a full excuse of performance together with strict notice requirements and a waiver, if allowed, from any applicable state laws.  Here is an example:

Excusable Delay.  Neither party will be liable for failing to perform an obligation under this agreement provided (i) such failure is the direct result of causes beyond such party’s control, including acts of God, fire, explosion, flood, drought, war, riot, or compliance with a directly applicable state or federal law (each, a “Force Majeure Event”); and (ii) the affected party notifies the other party in writing within ten (10) days of the occurrence of any such Force Majeure Event.  Subject to compliance with the foregoing, a party’s obligations hereunder will be postponed for such time and only to the extent its performance is suspended or delayed directly because of a Force Majeure Event and, upon the cessation of such Force Majeure Event, such party will promptly and fully resume its performance hereunder.  In addition, the parties intend this provision to govern outcomes in the event of any unforeseen circumstances and, to the maximum extent allowed by law, do hereby waive the provisions of Section 1511 of the California Civil Code and any other related doctrines of force majeure, impossibility or frustration of purpose that may otherwise apply to this agreement.

Force Majeure Provision – Balanced.  If you are depending upon the future performance of the other party but you are also concerned about your liability in the event you cannot perform in the face of a force majeure event, then you want a more balanced provision such as:

Force Majeure and Uncontrollable Events.  [Except for the payment of money for goods delivered or services rendered,] neither party will be liable for any interruption, delay or failure to perform any obligation under this agreement provided (i) such interruption, delay or failure results from causes beyond such party’s reasonable control, including any law [or act of any governmental authority], war, riot, terrorism, insurrection [or other hostilities], embargo, [fuel or energy shortage, equipment breakdowns, power failure,] pandemic, epidemic, fire, mass casualty event, flood, earthquake, act of God, [strikes, lockouts, labor shortages, failure of a third party to satisfy its contractual obligations,] or any other similar cause (each, a “Force Majeure Event”); and (ii) the affected party promptly notifies the other party [in writing] of the occurrence of any such Force Majeure Event.  Subject to compliance with the foregoing, a party’s obligations hereunder will be postponed for such time as its performance is suspended or delayed on account of a Force Majeure Event and, upon the cessation of such Force Majeure Event, such party will promptly resume its performance hereunder.  [In addition, the parties intend this provision to govern outcomes in the event of any Force Majeure event and, to the maximum extent allowed by law, do hereby waive the provisions of Section 1511 of the California Civil Code and any other doctrines of force majeure, impossibility or frustration of purpose that may otherwise apply to this agreement.]

You should carefully consider the [bracketed] language in the above provision and determine which party each clause most benefits given the circumstances and the specifics of your agreement.  The coronavirus pandemic clearly demonstrates that Force Majeure provisions cannot be a miscellaneous section afterthought and must be drafted with the same care and consideration used to craft the other material provisions of your agreement.

Force Majeure Provision – Pro Party most dependent on Performance of Other Party in full light of the Coronavirus Pandemic.  If you are depending upon the future performance of the other party and are entering into an agreement now with full knowledge of the coronavirus pandemic, then you should make it clear that the current crisis is fully acknowledged and the other party has clearly committed to their obligations in light of the challenges presented by the pandemic and agree that they have sufficient control over the situation to hold up their end of the agreement.  Signing a contract in the midst of such a crisis without such a clear acknowledgement risks granting the other side an immediate ‘get out of jail free card’ should they decide to breach their obligations under the agreement.  Here is an example:

Force Majeure and Uncontrollable Events.  Neither party will be liable for failing to perform an obligation under this agreement provided (i) such failure is the direct result of causes beyond such party’s control, including acts of God, fire, explosion, flood, drought, war, riot, or compliance with a directly applicable state or federal law (each, a “Force Majeure Event”); and (ii) the affected party notifies the other party in writing within ten (10) days of the occurrence of any such Force Majeure Event.  Subject to compliance with the foregoing, a party’s obligations hereunder will be postponed for such time and only to the extent its performance is suspended or delayed directly because of a Force Majeure Event and, upon the cessation of such Force Majeure Event, such party will promptly and fully resume its performance hereunder.  In addition, the parties intend this provision to govern outcomes in the event of any Force Majeure event and, to the maximum extent allowed by law, do hereby waive the provisions of Section 1511 of the California Civil Code and any other related doctrines of force majeure, impossibility or frustration of purpose that may otherwise apply to this agreement. Notwithstanding the foregoing, the parties acknowledge and agree that (A) the ongoing and accelerating coronavirus pandemic is a uniquely catastrophic event with far ranging and inherently unpredictable outcomes yet to be realized to include widespread and powerful government public health actions including restrictions and outright bans on gatherings and conducting business, widespread shelter in place orders and outright quarantines (collectively, the “Pandemic”); (B) each party has consulted experts and has invested the resources necessary to understand and determine the Pandemic’s impact upon such party’s business and such party’s ability to fully perform their obligations under this agreement; (C) at this time and for all time in the future the Pandemic is for all purposes an event understood and anticipated by the parties and the parties have the ability to manage their business in spite of the Pandemic in a way to ensure they will fully meet their obligations under the agreement; and (D) they will not declare the Pandemic a Force Majeure Event and will not avail themselves of the doctrines of force majeure, frustration of purpose, impossibility or any related concept or law to excuse their performance under the agreement.

Practical Advice

If you are involved in a contract in which one party cannot meet its obligations principally because of the coronavirus pandemic or related public heath restrictions, an outcome short of total breach is possible and certainly desirable for the breaching party.  The doctrines of Force Majeure and Frustration of Purpose join certain state laws to excuse performance of commercial contracts based on significant unforeseen events like the coronavirus pandemic that, in fairness, should allow a party to avoid its obligations.  If you are the party that may breach be sure to (i) review your agreement to determine if it has a Force Majeure or Uncontrollable Event provision and whether there are notice or other requirements that must be complied with; (ii) determine how material the coronavirus impacts have been to your potential breach in performance; and (iii) analyze how any Force Majeure provision or the concept of Frustration of Purpose or related state law applies to your situation.

This analysis will be specific to your circumstances, subjective in application and to some extent dependent on the governing law of your agreement.  You are encouraged to seek legal advice.  You should also take all reasonable steps to mitigate losses to all parties to and beneficiaries of the agreement and keep a log of specific impacts the coronavirus has had on your business, how it specifically prevents you from meeting your contractual obligations and all the loss mitigation efforts you undertake.  If notice of the Force Majeure event is required, you should have it reviewed by a qualified attorney before delivery to the other side to guard against an accidental repudiation of the agreement.

We are here to help whether you are concerned that you cannot meet one of your contractual obligations or if you need help keeping a business partner focused on their obligations to you.  Our highly experienced and practical team of business litigators can also efficiently assess your situation and help to quantify potential exposure and likely outcomes.  Given the high emotional and economic cost of disputes and especially litigation, the best approach is usually effective communication with the other side and a spirit of compromise as you seek an outcome fair to all parties.

(emphasis added)