COVID-19 - Excusable Non-Performance Due to COVID-19
A key question being asked today is whether the COVID-19 pandemic and ensuing government restrictions will excuse non-performance of otherwise binding contracts. The answer depends on the contractual language, the state law governing the contract, and purpose of the contract.
Multiple legal theories will apply to contracts tested by the current climate, and attorneys will invoke force majeure provisions and rely upon the legal doctrines of frustration of purpose or impossibility/impracticality. The unprecedented nature of the effect of COVID-19 shutdowns increases the probability of success, as these principles are most commonly successful when the event in question is “unforeseeable” when the contract was made. This does not end the inquiry, however, and a more specific answer of the availability of excused non-performance depends on the particular facts of any given case and the specific language of the contract in question. Further, since contract law is a state issue, the availability or application of these possible legal pathways will vary from state to state. An examination of these concepts are discussed herein below.
Force Majeure Provisions
The first place to look concerning excusable non-performance of a contract is, unsurprisingly, the contract itself. The key contractual provision that would excuse non-performance is the “force majeure” clause, an oft-included but atypically relied upon clause usually found near the end of an agreement. This type of provision is also commonly referred to as an “Act of God” clause, and indeed the words “Act of God” are usually included as an event that would trigger a force majeure clause.
As defined by the leading treatise on contracts, a force majeure clause provides a means by which the parties may anticipate, in advance, a condition that will make performance impracticable.[1] In New York, force majeure clauses are to be interpreted in accord with their purpose, which is to limit damages where performance of the contract has been frustrated due to an event that is “an extreme and unforeseeable occurrence that was beyond a party’s control and without its fault or negligence.”[2] Similarly, in New Jersey, a force majeure clause defines the area of unforeseeable events that might excuse nonperformance within the contract period, and the event must have been beyond the party’s control and arise without its fault or negligence.[3]
The key question, asked by many, is whether the current COVID-19 virus outbreak, labeled a pandemic by the World Health Organization[4] and resulting government edicts that have shuttered many businesses and significantly restricted gatherings and movement, falls under a force majeure clause. The fact that so many are asking the same question shows that straight answers are not readily available. There is a scarcity of legal precedent analyzing force majeure clauses with respect to acts of government or pandemics.[5]
Analysis begins, however, like any other contractual provision, with the language of the force majeure clause itself. “When the parties themselves define the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.”[6] Because the scope of a force majeure clause depends on its drafting, there can be no uniform rule as to when a force majeure applies to the current COVID-19 pandemic. The specific words of the contract matter, which are typically interpreted in view of the contractual terms, the surrounding circumstances, and the purpose of the contract.[7] As the Indiana Court of Appeals states, “the scope and effect of a force majeure clause depends on the specific contract language, and not on any traditional definition of the term. In other words, when the parties have defined the nature of force majeure in their agreement, that nature dictates the application, effect, and scope of force majeure with regard to that agreement and those parties, and reviewing courts are not at liberty to rewrite the contract or interpret it in a manner which the parties never intended.”[8]
Interpretation of Force Majeure Terms
In many states, a force majeure provision is construed narrowly and generally limited to events specifically listed in the provision.[9] Under this strict interpretation, the force majeure would only be relevant if pandemics or government orders were specifically listed in the provision. If those terms are included in a force majeure clause, the clause would clearly apply, as courts are not permitted to re-write contracts. To underscore this point, some courts have specifically recognized that force majeure clauses can be written broader than legal doctrines of impossibility.[10]
Further analysis is required if an event listed in a force majeure clause is close to, but not identical to, unforeseen event, i.e. a pandemic. For example, in a matter filed subsequent to the NHL lockout in 2005, an arena vendor was able to excuse performance under a force majeure clause because “labor dispute” was cited.[11] Many states, however, hold that general words are not to be construed to their widest extent, but apply only to the same general kind or class of events as those specifically mentioned.[12]
Catch-all Language
Most force majeure clauses include catch-all language such as, “any other activities or factors beyond its reasonable control, whether similar or dissimilar to any of the foregoing,” and whether or not the current events are included may depend on the breadth of the catch-all language. For example, one NY court ruled that the concluding catch-all of “or other similar causes” was found to be a limiting phrase that required the unlisted event to be similar to the events specifically spelled out in the force majeure clause.[13] Conversely, an Indiana court ruled the phrase, “or any other reason”, to be broad enough to cover dissimilar events in the force majeure clause when viewed in light of the nature of the agreement, the circumstances surrounding the execution of the contract, and the apparent purpose of making the contract.[14] Showing that courts can reach different conclusions with similar facts, however, a New York court held that the catch-all phrase, “for any reason”, did not sufficiently identify the specifically listed force majeure events.[15] Accordingly, in New York, a force majeure clause using the words “similar or dissimilar” would be most helpful to overcome strict constructions.[16]
There is also the frequently used term “Act of God,” which is itself a catch-all phrase of a fashion. It is presently unclear, however, whether a virus pandemic qualifies. Acts of God, legally speaking, do not require any intervention of a deity, but instead traditionally refer to unpredictable and unpreventable acts of nature - wildfires, earthquakes, widespread floods, or hurricanes.[17] For example, Federal and state courts have readily held that Hurricane Katrina was an “Act of God.”[18] Federal statutes define it as an “unanticipated grave natural disaster or other natural phenomenon of an exceptional, inevitable, and irresistible character, the effects of which could not have been prevented or avoided by the exercise of due care or foresight.”[19] Although typically a natural act, some jurisdictions have referred to events caused by humans as an “act of God.”[20] New Jersey generally defines the term as “all misfortunes and accidents arising from inevitable necessity which human prudence could not foresee or prevent.”[21] Left unexamined in court jurisprudence, at least as of yet, is whether a viral outbreak, which may include some level of human malfeasance, qualifies as an “Act of God” event in any given state.
Foreseeability
One issue that is usually of key importance, but may not be presently relevant, is foreseeability. Many force majeure cases turn on whether the event was foreseeable. If an event is found to be foreseeable, but not specifically listed in the force majeure provision, courts generally do not allow a defense based on that provision.[22] Further, courts have consistently ruled that financial distress as an event in itself is foreseeable and not encompassed by force majeure clauses.[23] Whether an unprecedented health pandemic will be deemed to be “foreseeable” depends upon many factors, and, unfortunately, the particular court determining the issue. The extent of the shutdown will certainly militate in favor of this being an unforeseen event.
Other Requirements to Activate Force Majeure Provision
Whether the current pandemic or government actions fall within the force majeure is not necessarily sufficient without further actions by the party seeking to be excused for non-performance. Often a force majeure provision includes further requirements that must be met in order to invoke the clause, such as a requirement of notice or a diligence to mitigate damages to the extent possible. The specific contact language must therefore be scrutinized to determine if additional actions to be taken. Further, in some jurisdictions such as California, a duty to mitigate damages attaches whether it is specified in the force majeure clause or not.[24]
Frustration of Purpose
It may be that a contract does not have a force majeure clause, or that the force majeure provision is not written in a way to be activated in response to this pandemic. Under these circumstances, the doctrine of frustration of purpose may provide an alternative path to excuse non-performance. Although the doctrine can vary from state to state, frustration of purpose generally discharges a party’s performance of a contract where “a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.”[25]
This doctrine filtered over from the UK in the early 1900s, and one of the earliest cases in New York involved a party who purchased advertising in a “Souvenir and Program of International Yacht Races” publication that was to be distributed and sold at a series of cup yacht races. The yacht races were postponed due to World War I, but the program’s publisher still published the program as a “souvenir,” sold it on some newsstands, and demanded payment from advertisers. The Appellate Division of New York ruled in favor of the advertiser, holding that “the situation, as it turns out, has frustrated the entire design on which is grounded the promise. The object in mutual contemplation having failed, plaintiff cannot exact the stipulated payment.”[26] In a considerably more recent example, frustration of purpose was found when a premises rented for use of an executive recruiting firm turned out to have a residential use only certificate of occupancy, thereby frustrating the purpose of the lease and excusing performance.[27]
The frustration of purpose doctrine may have wide application in view of various government orders closing businesses and restricting potential consumer movement or gatherings. Some contracts, such as advertising purchases, may technically be able to be carried out, but there may be a frustration of purpose if few consumers are able to consume the advertising due to closings, postponements or restricted movement. Such a scenario may overcome a court’s usual analysis of what a “purpose” of a contract is, wherein a “purpose” is so frustrated that the transaction would have made little sense.[28]
Similar to force majeure provisions, the concept of foreseeability is typically relevant but likely not an issue in the current environment. Generally, the frustration of purpose doctrine is not available where the event which allegedly frustrated the purpose of the contract was clearly foreseeable.”[29]
The more relevant issue will be to discern the applicability of the doctrine in a particular state. New Jersey, for example, follows the Restatement (Second) of Contracts § 265 that tracks closely to the New York doctrine.[30] Conversely, states like Indiana have never recognized frustration of purpose, and instead requires that a party’s performance become impossible before excusing it.[31] Mississippi similarly does not recognize the doctrine.[32] Accordingly, further analysis will be required to determine the applicable laws of a given jurisdiction.
Impossibility and Impracticality
Thematically similar to frustration of purpose is the doctrine of impossibility or impracticality, which excuses a party’s performance when performance is objectively impossible.[33] Generally, the doctrine of impossibility excuses nonperformance when: (1) an unexpected intervening event occurred; (2) the event was not foreseeable; and (3) the unexpected event made contractual performance impossible. The intervening event that creates the impossibility may be “an act of God, vis major, or by law.”[34]
In the present circumstances, impossibility of performance via various government declarations would enable a viable argument that performance was rendered impossible “by law.” A party’s contractual obligation is discharged when performance of the contract is prevented by governmental order.[35] For example, prevention by an executive or administrative order designed for the benefit of the general public may be considered excusable impracticability whether the order is directed to the general public or to an individual person.[36] Discharge by impossibility typically puts an end to the obligation,[37] but in some cases a court may suspend a party’s performance rather than fully discharge it.[38] Of course, like contractual interpretation of a force majeure clause and the frustration of purpose doctrine, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.[39]
Impossibility is usually held to a strict standard, such as in New York, where mere impracticality or unanticipated difficulty is not enough to excuse performance.[40] The more generous doctrine of impracticality is recognized in other states, however, such as in New Jersey, Delaware and California. Under this doctrine, the party seeking to be relieved of the duty to perform only needs to show that performance has unexpectedly become impracticable as a result of a supervening event.[41] A thing is typically found impracticable when it can only be done at an excessive and unreasonable cost.[42]
Conclusion
There are multiple grounds to explore to excuse non-performance in light of the current COVID-19 pandemic and ensuing government actions. Which ones apply best, however, or at all, will require particular examination of the contractual language and the case law of the relevant jurisdiction.
Contact
Please do not hesitate to direct questions or comments to Scott R. Matthews at (212) 237-1025, or smatthews@windelsmarx.com.
Disclaimer
In some jurisdictions, this material may be deemed as attorney advertising. Past results do not guarantee future outcomes. Possession of this material does not constitute an attorney / client relationship.
[1] 8 Corbin on Contracts § 31.4.
[2] Constellation Energy Servs. of New York, Inc. v. New Water St. Corp., 146 A.D.3d 557, 558, 46 N.Y.S.3d 25, 27 (N.Y. App. Div. 2017); Team Mktg. USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 942, 839 N.Y.S.2d 242, 246 (2007); State of N.Y. v. Allied-Signal Inc., 987 F. Supp. 137, 143 (N.D.N.Y. 1997).
[3] Gulf Oil Corp. v. F.E.R.C., 706 F.2d 444, 452 (3d Cir. 1983).
[4]https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19---11-march-2020
[5] ARHC NVWELFL01, LLC v. Chatsworth at Wellington Green, LLC, No. 18-80712, 2019 WL 4694146, at *4 (S.D. Fla. Feb. 5, 2019).
[6] Constellation Energy Servs. of N.Y., Inc. v. New Water St. Corp., 46 N.Y.S. 3d 25, 146 A.D. 3d 557, 558 (1st Dep’t 2017).
[7] Facto v. Pantagis, 390 N.J. Super. 227, 232, 915 A.2d 59, 62 (App. Div. 2007).
[8] Specialty Foods of Indiana, Inc. v. City of S. Bend, 997 N.E.2d 23, 26 (Ind. Ct. App. 2013).
[9] Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 903, 519 N.E.2d 295, 296 (NY Ct. App. 1987).
[10] Stein v. Paradigm Mirasol, LLC, 586 F.3d 849, 857 (11th Cir. 2009)(“It appears to us that force majeure clauses broader than the scope of impossibility are enforceable under Florida law.”).
[11] Bouchard Transp. Co. v. New York Islanders Hockey Club, LP, 40 A.D.3d 897, 898, 836 N.Y.S.2d 654, 655 (2007).
[12] Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 903, 519 N.E.2d 295, 296 (NY Ct. App. 1987); Stroud v. Forest Gate Dev. Corp., Nos. 20063-NC, 20064-NC, 2004 Del. Ch. LEXIS 66, at *19 (Ch. May 5, 2004); Sherwin Alumina L.P. v. AluChem, Inc., 512 F. Supp. 2d 957, 966 (S.D. Tex. 2007).
[13] Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 903, 519 N.E.2d 295, 296 (NY Ct. App. 1987)
[14] Specialty Foods of Indiana, Inc. v. City of S. Bend, 997 N.E.2d 23, 26 (Ind. Ct. App. 2013) (Specialty foods was hired to be a vendor in a Hall of Fame facility. When the Hall of Fame ceased to exist in South Bend, so too did the need for the services provided by Specialty Foods.)
[15] Team Mktg. USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 943, 839 N.Y.S.2d 242, 246 (2007).
[16] Castor Petroleum v. Petroterminal De Panama, 107 A.D.3d 497, 498, 968 N.Y.S.2d 435, 436 (2013).
[17] Black's Law Dictionary (11th ed. 2019).
[18] See e.g. Conagra Trade Group, Inc. v. AEP MEMCO, LLC, 2009 U.S. Dist. LEXIS 58658, 2009 WL 2023174 (E.D. La. 7/9/09) (J. Fallon) (“It is uncontested that Hurricane Katrina was an unexpected and extraordinary force of nature, which is capable of being classified as an Act of God at law.”).
[19] 42 U.S.C.A. § 9601.
[20] 14 Corbin on Contracts § 74.4 (2019).
[21] Facto v. Pantagis, 390 N.J. Super. 227, 232, 915 A.2d 59, 62 (App. Div. 2007).
[22] See, e.g., URI Cogeneration Partners, L.P. v. Bd. of Governors for Higher Educ., 915 F. Supp. 1267, 1287 (D.R.I. 1996)(“force majeure clauses have traditionally applied to unforeseen circumstances—typhoons, citizens run amok, Hannibal and his elephants at the gates—with the result that the Court will extend [the provision] only to those situations that were demonstrably unforeseeable at the time of contracting.”); In re Cablevision Consumer Litig., 864 F. Supp. 2d 258, 264 (E.D.N.Y. 2012).
[23] 14–74 Corbin on Contracts § 74.7.
[24] Watson Labs., Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099, 1110 (C.D. Cal. 2001)(“Under California law, no contractor is excused from breach of contract under express force majeure provision in contract unless he shows affirmatively that his failure to perform was proximately caused by contingency within its terms, and that, in spite of skill, diligence, and good faith on his part, performance became impossible or unreasonably expensive”)
[25] Sage Realty Corp. v. Jugobanka, D.D., No. 95 CIV. 0323 RJW, 1997 WL 370786, at *2 (S.D.N.Y. July 2, 1997).
[26] Alfred Marks Realty Co. v. Hotel Hermitage Co., 170 A.D. 484, 484–85, 156 N.Y.S. 179, 179–80 (App. Div. 1915).
[27] Jack Kelly Partners LLC v. Zegelstein, 140 A.D.3d 79, 81, 33 N.Y.S.3d 7, 8 (N.Y. App. Div. 2016).
[28]Crown IT Servs., Inc. v. Koval–Olsen, 11 A.D.3d 263, 265, 782 N.Y.S.2d 708 [1st Dept.2004
[29] Bank of Am. Nat. Tr. & Sav. Ass'n v. Envases Venezolanos, S.A., 740 F. Supp. 260, 266 (S.D.N.Y.), aff'd sub nom. First Nat. Bank Maryland v. Envases Venezolanos, 923 F.2d 843 (2d Cir. 1990).
[30] JB Pool Mgmt., LLC v. Four Seasons at Smithville Homeowners Ass'n, Inc., 431 N.J. Super. 233, 246–47, 67 A.3d 702, 709–10 (App. Div. 2013).
[31] Lutheran Homes, Inc. v. Lock Realty Corp. IX, 2015 U.S. Dist. LEXIS 24588 (N.D. Ind. 2015).
[32] Horton Archery, LLC v. Farris Bros., 2014 U.S. Dist. LEXIS 160223 (S.D. Miss. 2014).
[33] Harlem Real Estate LLC v. New York City Economic Development Corp., 2009 WL 1672851 (Sup. Ct. 2009).
[34] Kolodin v. Valenti, 115 A.D.3d 197, 200, 979 N.Y.S.2d 587 (2014).
[35] Consumers Power Co. v. Nuclear Fuel Servs., Inc., 509 F. Supp. 201, 210 (W.D.N.Y. 1981); Sutherlin v. Wells Fargo & Co., 297 F. Supp. 3d 1271, 1278 (M.D. Fla. 2018), aff'd sub nom. Sutherlin v. Wells Fargo Bank N.A., 767 F. App'x 812 (11th Cir. 2019).
[36] 30 Williston on Contracts § 77:63 (4th ed.).
[37] Matter of Fontana D'Oro Foods, Inc., 122 Misc.2d 1091 (Sup. Ct. 1983.)(“When performance of a contract depends on the continued existence of a thing, and such continued existence was assumed as the basis of the agreement, the destruction of the thing puts an end to the obligation.”)
[38] Patch v. Solar Corp., 149 F.2d 558 (C.C.A. 7th Cir. 1945) (intervening regulation of the War Production Board prohibiting the manufacture of washing machines, to conserve strategic war materials, suspended but did not discharge the manufacturing-royalty contract between parties)
[39] Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902, 519 N.E.2d 295, 296 (1987).
[40] Phibro Energy, Inc. v. Empresa de Polimeros de Sines Sarl, 720 F.Supp. 312, 318 (S.D.N.Y.1989).
[41] Facto v. Pantagis, 390 N.J. Super. 227, 233, 915 A.2d 59, 62 (App. Div. 2007); Freidco of Wilmington, Ltd. v. Farmers Bank of Delaware, 529 F. Supp. 822, 825 (D. Del. 1981).
[42] Habitat Tr. for Wildlife, Inc. v. City of Rancho Cucamonga, 175 Cal. App. 4th 1306, 1336, 96 Cal. Rptr. 3d 813, 843 (2009).
