Force Majeure in the Wake of Coronavirus (COVID-19)
Force Majeure in the Wake of Coronavirus (COVID-19)
By: Kenneth Falcon, Esq.
The global coronavirus (COVID-19) pandemic has had an unprecedented effect on the everyday lives of millions of people. One result of the outbreak is the diminished ability of businesses to perform their contractual obligations, and businesses are now seeking to determine whether there is a way to excuse their contractual performance temporarily or even permanently. The crisis has sparked a strong interest in the concept of force majeure, which may provide a way to avoid the obligation to perform under a contract if a party is unable to fulfill its contractual obligations. However, not every contract has a force majeure clause, and even if yours does, you can expect judicial scrutiny if you try to invoke it. This article provides an overview of the impact of COVID-19 on force majeure clauses and related common law doctrines as applied to businesses in New York.
What is Force Majeure?
Force majeure (from the French phrase “superior force”) is a clause included in many contracts that may excuse nonperformance resulting from an extraordinary or unforeseeable set of circumstances. Contracts may expressly include a force majeure clause that specifically lists certain events which would justify a party’s nonperformance. Common examples include:
- a declaration of war
- a government order or embargo
- a global pandemic
- other catchall phrases such as “acts of God” or other similar clauses or phrases
Force majeure events tend to be major crises, and as such, it is understandable that parties would seek to draft contracts which allow unfulfilled contract obligations to be forgiven in such circumstances. When force majeure excuses nonperformance, parties should not be liable for a breach of contract claim stemming from that nonperformance.
How are Force Majeure Clauses Interpreted?
New York courts generally interpret force majeure clauses narrowly. Courts will limit application of the concept to the events specifically listed in a force majeure clause of the specific contract. If the contract contains no force majeure clause, then nonperforming parties cannot use force majeure to avoid liability (nonperforming parties may have other recourse; more on that below). Courts are reluctant to expand application of the clause, but when they do, they tend to use non-technical, common-sense definitions of the terms listed by the parties.
Does My Contract Cover COVID-19?
Interpretation of force majeure clauses is highly dependent on the specific terms of the contract. Every contract will be different and may be interpreted differently, especially as different governmental bodies have committed to new actions to address the current pandemic on a near-daily basis.
Performance is likely to be excused if your contract specifically mentions a pandemic or quarantine. The World Health Organization formally designated COVID-19 as a global pandemic, and most governments have implemented drastic quarantine measures across the globe. Business closures and shelter-in-place orders could implicate force majeure if the court determines your contract contemplates similar scenarios, and they have actually prevented you from performing your duties. Some clauses list “governmental sanctions, orders, or the like” as a possible force majeure event. In these cases, courts will analyze whether the action was truly “governmental” and how restrictive it was on the party’s ability to perform. A stay-at-home order, would very likely fall within the scope of such a provision as long as such an order materially interferes with performance under the contract.
Example: A contract lists a “pandemic” or a “quarantine” as a force majeure event. It is likely that the current COVID-19 pandemic will be treated as triggering the force majeure language in the contract. However, whether the specific facts support excusal of performance would still require further analysis.
Example: A contract lists an “act of God” as a force majeure event, but does not otherwise specify “pandemic” or “quarantine.” It is unlikely a court would view the COVID-19 situation as an “act of God,” a term normally reserved for natural disasters.
Example: A contract lists “government mandate or other similar act”. It is likely that a court would view the current nonessential business closure as a force majeure event.
Force Majeure in New York
New York courts follow the overall trend of interpreting force majeure clauses narrowly. The highest court in the state, the Court of Appeals, has said: “Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused.” Kel Kim Corp. v. Central Markets, Inc. 70 N.Y.2d 900, 902 (1987). If your force majeure clause does not specifically include terms such as “pandemic,” “quarantine,” or perhaps “government action,” it is unlikely that a New York court will allow force majeure to prevent liability for breach. However, there may be some room for argument in a contract containing a “catch-all” provision, or terminology that is vague or ambiguous.
What if the Force Majeure Provision is Ambiguous?
An ambiguous contract term before a New York court will generally be constructed against the drafter. That means any ambiguous term or provision will be interpreted in a way that disfavors whichever party actually wrote it. This idea has a long and rich line of support throughout New York case law, but what about force majeure clauses? They are, after all, contractual. While no reported decision explicitly shows a court applying this rule of construction to the force majeure context, a New York court would probably do so. Force majeure litigation typically arises when parties disagree over whether a certain event is covered by their contract. Therefore, courts have the option of interpreting a vague force majeure clause against the interest of the drafter seeking to excuse their own nonperformance or hold their counterparty liable for nonperformance despite the force majeure clause. Either way, there is no reason to believe that this would be the one arena in which New York courts turn from their longstanding tradition of contract interpretation.
Other Relevant Common Law Doctrines
What happens if your contract does not include a force majeure provision, or if the clause is constructed too narrowly to apply to COVID-19? In the absence of a relevant force majeure provision, certain common law contract doctrines may still apply to excuse nonperformance. The doctrines of “impracticability” and “frustration of purpose” are two examples which may apply in the current circumstances. These common law doctrines allow for a contract to be voided if performance has become nearly impossible due to intervening circumstances (such as the coronavirus) or if, as a result of those circumstances, the whole purpose of the agreement no longer makes sense.
Example: Imagine a contract to sing the national anthem at a baseball game. Of course, all sporting events have been postponed indefinitely, so nonperformance will be excused (likely under either of these clauses) even in the absence of a force majeure clause.
The current coronavirus pandemic is truly unprecedented, and businesses are being forced to make decisions that were unthinkable just weeks ago. Businesses seeking to avoid performance of a contractual obligation have different options to consider, including relying on the language of force majeure clauses and the applicability of other common law doctrines. These decisions are complex, highly factually dependent, dependent on the specific language in the contract at issue, and must be considered on a case-by-case basis. For that reason, any such decisions should be made strategically and in concert with a trusted legal advisor.
If you have any questions, please contact Kenneth Falcon at firstname.lastname@example.org or (212) 203-3255.
This article is not legal advice and does not create any attorney-client relationship. This article does not provide a definitive legal opinion for any particular factual situation. Before the firm can provide legal advice to any person or entity, the specific contract at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the firm’s scope and terms of representation.