Force Majeure Provisions During the Pandemic: Questions To Ask Now
The global pandemic caused by the novel coronavirus (COVID-19) has upended our lives and businesses in ways, and to a degree, that few would have anticipated even a month ago. Most tragically, estimates now project that hundreds of thousands, and perhaps millions, of people will be infected, and the death rate will continue its terrible climb. But even while we mourn the human toll of this global health emergency, we recognize that businesses must reckon with the coronavirus’s devastating blow to “business as usual.”
There is a human reason that companies must act quickly to face these challenges: businesses that lack the agility and judgment to navigate this perilous moment may not survive to support their employees, customers, counterparties, and stakeholders.
This is our first in a series of brief notes about the issues that businesses are facing in the midst of the coronavirus pandemic. Today, we consider how the disruptions caused by the coronavirus and its rippling consequences may impact the contracts that businesses entered into before the crisis, and are now unable to perform. In particular, we highlight some of the initial questions that we suggest businesses should think about as they attempt to assess their options and obligations under the force majeure provisions that were drafted during normal times, but now must be interpreted against these extraordinary circumstances.
What Is a “Force Majeure” Provision? Which Contracts Have Them?
Contracts often include a “force majeure” provision, which allocates between the contracting parties the risks arising from events outside the parties’ control. As the Second Circuit Court of Appeals explained in Phillips Puerto Rico Core, Inc. v. Tradax Petroleum, Ltd., the primary purpose of the force majeure doctrine is to “relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated.” 782 F.2d 314, 319 (2d Cir.1985).
The term “force majeure” as used in U.S. law is borrowed from the French legal term, and means, literally, “superior force.” Black’s Law Dictionary (11th ed. 2019). More practically, it means “an event or effect that can be neither anticipated nor controlled . . . an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to do.” Id.
What it means now: While most businesses hope that their force majeure provisions are never relevant, in the present circumstances, companies would be well advised to identify all of their contracts that impose obligations implicated by the challenges of the coronavirus pandemic. This includes obligations that they might be unable to perform, as well as obligations that their counterparties might be unable to perform.
What Does the “Force Majeure” Provision Say?
Force majeure provisions, like virtually every contractual term, run the gamut from broad and vague—“any act or event which wholly or partially prevents or delays the performance of obligations arising under this Agreement if such act or event is not reasonably within the control of and not caused by the fault or negligence of the nonperforming Party,” PT Kaltim Prima Coal v. AES Barbers Point, Inc., 180 F. Supp. 2d 475, 480 (S.D.N.Y. 2001)—to highly specific—“an earthquake, hurricane, tornado, flood, or other similar act of God . . . fire . . . strikes or similar labor disputes,” Fort Howard Senior Hous. Assocs., LLC v. United States, 121 Fed. Cl. 636, 642 (Ct. Fed. Cl. 2015).
Assessing how a court would interpret any particular provision is a highly fact-intensive analysis. Experienced counsel could assist companies evaluating how their own contracts are situated against the backdrop of the relevant law. In this analysis, there are some general principles of interpretation that we expect any New York court would be guided by when interpreting a particular clause.
First, force majeure clauses are “narrowly construed.” Reade v. Stoneybrook Realty, LLC, 63 A.D.3d 433, 434 (1st Dep’t 2009). Ordinarily, a force majeure clause will not excuse performance unless it specifically anticipates the peril that has prevented performance of the obligation. Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902-903 (1987).
Second, while many force majeure clauses enumerate specific events, followed by a more general provision (such as, “any strike, fire or other event falling within the term ‘Force Majeure,’” Phillips Puerto Rico Core, Inc. v. Tradax Petroleum Ltd., No. 82 CIV 2770 (RLC), 1984 WL 677, at *4 (S.D.N.Y. Aug. 2, 1984), aff’d, 782 F.2d 314 (2d Cir. 1985) (emphasis added), courts interpret these “catch-all” provisions under the doctrine of ejusdem generis, which means that “words constituting general language of excuse are not to be given the most expansive meaning possible, but are held to apply only to the same general kind or class as those specifically mentioned.” Kel Kim Corp., 131 A.D.2d at 949-50. In other words, a party is unlikely to be allowed to avail itself of a general “catch-all” if the actual peril at issue is unlike the specific enumerated perils that precede the catch-all. Thus, for example, a provision that specifically referred to a “strike or fire or other event” could not be invoked where performance was prevented by mechanical inspections and detention by government authorities, because even though these were “other events,” they bore no resemblance to a “strike or fire.” Phillips Puerto Rico Core, 1984 WL 677, at *4.
Third, parties seeking to rely on a “catch-all” provision, as opposed to a specifically named peril, will need to show that the event that prevented their performance was unforeseeable. Phibro Energy, Inc. v. Empresa De Polimeros De Sines Sarl, 720 F. Supp. 312, 318 (S.D.N.Y. 1989). We anticipate that this requirement will be the subject of litigation in the months ahead, as parties dispute whether the particular challenges brought about directly and indirectly by the coronavirus pandemic were “foreseeable” or not.
What it means now: Companies should consider reviewing all of their relevant force majeure clauses, and cataloguing them, so that they are prepared to evaluate in a systematic way how they might apply to the present and evolving circumstances.
In thinking about how their force majeure clauses apply to these circumstances, they should consider working with counsel to think creatively about interpretative issues as informed by the relevant precedent. Given the unprecedented nature of some of the challenges that this pandemic has caused, the narrowing and limiting interpretive rules discussed above should not cause companies to reject the possibility that their force majeure clauses may offer needed relief, or create potential liabilities, depending on which side of the contract they are on.
Is Performance Impossible? Why?
Parties seeking to rely on force majeure provisions to excuse their non-performance often fail because they have not shown that performance is impossible, as opposed to merely impractical. Phibro Energy, Inc., 720 F. Supp. at 318.
Similarly, courts have routinely rejected parties’ claims that adverse economic conditions, financial hardship, and even sometimes calamitous business circumstances, constitute a force majeure. See, e.g., Route 6 Outparcels, LLC v. Ruby Tuesday, Inc., 88 A.D.3d 1224, 1226 (3d Dep’t 2011). The court’s discussion in Route 6 Outparcels is instructive:
While defendant, of course, had no control over the world economy, the decisions it made with respect to how to cope with the financial downturn—notwithstanding that its options may have been limited— remained within [its] power and control. . . . Economic factors are an inherent part of all sophisticated business transactions and, as such, while not predictable, are never completely unforeseeable; indeed, financial hardship is not grounds for avoiding performance under a contract.
Id. (citation omitted).
Moreover, a party relying on a force majeure clause to excuse its performance is generally required to “show what action it took to perform its contractual duties despite the calamity relied upon to excuse performance.” Phillips Puerto Rico Core, 1984 WL 677, at *4. It must “show that it exercised due diligence to overcome the effects of the specific force majeure events.” Id. (citation omitted).
What it means now: Companies that find themselves unable to perform their obligations should think about whether they are developing and maintaining a clear record that will demonstrate the efforts that they undertook to perform, and the specific reasons that they could not.
Companies that find their counterparties claiming an inability to perform should test those assertions, consider whether performance is truly impossible, and work to develop a record supporting any theory under which the present challenges might have been navigated. They should not concede that mere financial hardship rises to a force majeure.
Companies on both sides of contracts should also keep continuously apprised of changing and newly-issued directives, whether Executive Orders, local rules or regulations, or legislation at the Federal, state, or local level, that might affect the (im)possibility of their performance under the relevant contracts. This is another area where experienced counsel may be able to assist their clients.
Is Notice Required? When?
Contracts also often require that a party seeking to rely on a force majeure provision to excuse its non-performance provide timely notice of the circumstance to its counterparty. See, e.g., Vitol S.A., Inc. v. Koch Petroleum Grp., LP, No. 01-CV-2184 (GBD), 2005 WL 2105592, at *11 (S.D.N.Y. Aug. 31, 2005). The failure to provide such notice, within the time specified by the contract, can be fatal to any later reliance on the force majeure provision. Id.; see also PT Kaltim Prima Coal, 180 F. Supp. 2d at 483.
What it means now: Companies that believe their performance may be rendered impossible by the circumstances arising from the coronavirus pandemic should consider whether their contracts require notice to the counterparty, and when. Companies should consider implementing a tracking system to monitor these important notice deadlines. Companies should consider working with counsel to assess whether notice is required, and, if so, to timely develop an appropriate form of notice that satisfies the relevant contract and applicable law.
What If There Is No Force Majeure Clause in the Contract?
Even if a governing contract does not include a force majeure clause, common law principles may still excuse performance where it is rendered impossible by unforeseeable events, or the entire purpose of the contract is frustrated. These doctrines will be the subject of our next brief note.
Companies seeking to make sense of their obligations in light of the coronavirus pandemic should carefully evaluate all of the contracts that contain obligations that might be rendered impossible by these circumstances. If these contracts contain force majeure clauses, companies should think closely about how those clauses might be implicated by the present and evolving circumstances.
We anticipate that relatively few force majeure clauses anticipate the specific event of “global pandemic,” but this should not be the end of the analysis. Companies should consider more precisely which particular circumstances have rendered performance impossible—
- Is it an Executive Order directing certain non-essential businesses to close, in which case it might be a “governmental prohibition,” as contemplated by some force majeure clauses, see Reade, 63 A.D.3d at 434?
- Is it a stay-at-home Order directing certain non-essential workers to stay home, effectively disabling the company from performing its work, in which case it might be a “government order,” as contemplated by some force majeure clauses, see Goldstein v. Orensanz Events LLC, 146 A.D.3d 492, 492 (1st Dep’t 2017)?
- Is it illness of employees or others, in which case it might be “sickness,” as contemplated by some force majeure clauses, see Belgium v. Mateo Prods., Inc., 138 A.D.3d 479, 479 (1st Dep’t 2016)?
In all events, we anticipate that the coming months will see litigation over the meaning of broad terms of peril—“acts of God,” “emergencies,” “natural disasters,” and the like—and how they, as well as catch-all provisions of every sort, should be applied to these unprecedented circumstances. Given the likelihood that the law on these issues will not be resolved until after contractual notice periods have closed, companies should pay close attention to their notice obligations now, and be sure to protect their rights by giving timely and adequate notice of their intent to invoke their force majeure rights.
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This is not intended to provide legal advice for specific situations, and no legal or business decision should be based on its content. If you would like us to advise you on your specific situation, please feel free to contact us.