by Robert C. Niesley, Senior Partner and Colin C. Holley, Partner, of Watt, Tieder, Hoffar & Fitzgerald LLP
As the tragic and devastating impacts of the coronavirus (COVID-19) pandemic continue to mount, and as the government and private sectors ramp up efforts to address the spread of the disease, we are seeing disruption of businesses on a massive scale. Labor shortages, delays in supply and distribution of materials, unavailability of services, and closures of workplaces, are just a few examples of the disruptions inevitably caused by the travel restrictions, quarantines, cancellations of large gatherings, and other efforts being taken to address the crisis. We understand that our clients are facing a myriad of issues and difficulties as a result of the growing crisis and will be working through the effects for some time to come.
It is critical for our clients to consider the extent to which the coronavirus pandemic may excuse contract performance under force majeure clauses. This article highlights the key points our clients should consider in assessing options under existing contracts and in implementing measures to ensure their interests are protected in the future.
Determining Whether Your Contracts Have Force Majeure Clauses
It is important to first identify which of your contracts are being impacted, or will likely be impacted, by the pandemic and review them to determine if they include force majeure clauses. Force majeure—which translated literally from the French means “superior force”—is the term commonly used for clauses that deal with unexpected events beyond the control of the contracting parties. These are sometimes called “Acts of God” provisions, and may address natural disasters such as floods, tornadoes, earthquakes and hurricanes, or man-made disruptions such as acts of terrorism, riots, strikes, and wars.
Your contracts may have such a clause even if the specific terms “force majeure” or “Acts of God” are not used. Look for any provision that addresses major events beyond the control of the contracting parties. In many contracts the force majeure language is in the “miscellaneous” or “general” provisions near the end of the contract.
When a contract includes a force majeure clause, it will control the parties’ rights, obligations, and potential remedies when a disruptive event beyond the control of the parties occurs.
Relying On General Legal Principles For Contracts Without Force Majeure Clauses
If you have an impacted contract that does not have a force majeure clause your performance may still be excused. The doctrine of force majeure is related to general principles of contract law that can apply to any contract unless overridden by the terms of a force majeure or similar clause. Specifically, the law in certain narrow circumstances allows performance to be excused when it would be impossible or impracticable, or the core purpose of the contract has been frustrated, due to unexpected events. However, the contours of rights under those doctrines is less clear and more difficult to enforce than rights existing under a force majeure clause.
Determining Whether The Coronavirus Pandemic Is A Force Majeure Event
Determining rights, obligations, and potential remedies under a contract with a force majeure clause typically requires a complex analysis of the contract language, the governing law, and the totality of the situation. The first step is to determine whether the coronavirus pandemic qualifies as a force majeure “event” under a clause. In other words, does the clause and its various provisions even apply to a situation caused by the pandemic.
The starting point is always the language used in the clause. Some clauses specifically include “communicable diseases,” “disease outbreaks,” “epidemics,” or “pandemics” as triggering events. If the contract clause lists any of these as covered events, the clause clearly applies and its provisions will control the rights and obligations of the parties. In the absence of such specific terms, assessing whether the coronavirus pandemic is a force majeure event may be considerably more difficult and may require interpretation under the body of law that applies to the contract, such as the law of a particular state. It is possible that established industry or trade practice, or the course of dealings between the parties if force majeure issues have previously arisen, may also factor into the interpretation of the clause.
The laws of most U.S. states require force majeure clauses to be interpreted narrowly—events that do not appear to have been within the contemplation of the contracting parties will not be viewed as force majeure events. (See Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902–903 (1987), and Constellation Energy Servs. of New York, Inc. v. New Water St. Corp., 46 N.Y.S.3d 25 (N.Y. App. Div. 2017)). For example, if a clause lists triggering events as including only “acts of terrorism, riots, strikes, natural disasters resulting from weather, and similar events,” a court likely would not find the coronavirus pandemic to be a triggering similar event, because the parties chose to include only man-made disruptions and weather events in the clause.
The coronavirus pandemic, however, may certainly trigger some force majeure clauses that do not include specific references to diseases, epidemics or pandemics. Clauses that include “acts of government” or “states of emergency,” for example, may apply if a causal link between a government action and the impossibility of performance can be established. That analysis might not be very clear. For example, assume hypothetically that the next major step in a project is the pouring of extensive concrete foundations and all concrete companies in the area with enough capacity to handle the project have suspended all operations for several weeks after the government declared a state of emergency. Arguably, the government action does not make performance impossible because a concrete company could continue work without violating any express government directive. Suspending work, however, might be viewed as a highly reasonable step in furtherance of public health under the state of emergency, and could therefore be deemed causally linked to the government action. Ultimately, in any unclear circumstance the specifics of the situation will have to be assessed to determine whether a strong argument can be made that a force majeure event has occurred.
In addition to listing triggering events, force majeure clauses may also have “catch-all” language, such as the inclusion of “any other events not reasonably foreseen and not within the reasonable control of the parties.” This broadly inclusive language would likely be interpreted to include a major disease pandemic. (See Specialty Foods of Indiana, Inc. v. City of S. Bend, 997 N.E.2d 23, 28 (Ind. Ct. App. 2013)). As discussed above, however, catch-all language may be more limiting if it only includes, for example, “any other events similar to” specifically listed events. Whether such a clause is interpreted to include the coronavirus pandemic will depend on what types of events are specifically listed, and if a reasonable argument can be made that a communicable disease pandemic is “similar” to the listed events.
Force majeure clauses also may define a triggering event more generally, simply as an unforeseen event beyond the control of the parties, but the clause may limit applicability in different ways. Such a clause might, for example, say that performance is excused by the event only if performance would be impossible, or commercially impracticable. In many situations it would be difficult to reasonably argue that performance is impossible or commercially impracticable if there is any means whatsoever of performing, irrespective of the unexpected cost and effort required, such as by finding other sources for manufacturing, supplies, or services. On the other hand, if a clause specifically requires only a showing that performance would be “commercially unreasonable” or “an unreasonable financial hardship” under the circumstances, it would be much easier to argue that performance is excused.
Determining the Consequences Of Claiming That Performance Is Excused
Claiming that performance is excused might not be in a company’s best interest even if a force majeure clause would legally allow the company to do so. The contract should be analyzed in full to determine, for example, whether triggering the force majeure clause would in turn excuse other parties from providing valuable consideration or would perhaps even allow termination of the entire contract. In that situation, if performance of the obligation would be much more expensive than expected but not impossible, taking on the added expense might be a better outcome than losing out on the performance of other parties or perhaps abandonment of the entire contract. It is also important to consider the impact that refusing to perform might have on the company’s business reputation, as well as on existing and future relationships.
Taking Actions Necessary to Excuse Performance
If a force majeure clause is reasonably interpreted to include the coronavirus pandemic as a triggering event, the next step is to determine whether actions must be taken to excuse performance, or whether actions must be taken to avoid losing certain remedies.
* Giving Timely Notice
It is critical to determine whether the force majeure clause, or some other applicable provision of the contract, requires a party to provide notice that it claims that its performance is excused. A clause might require that notice be provided within a specific number of days after occurrence of the triggering event. Failing to provide the required notice could prevent reliance on the force majeure clause to excuse nonperformance if a claim of breach is filed.
* Mitigation Of Damages
A force majeure clause might also require steps to be taken to reduce the severity of the impact of nonperformance on the parties. Such steps might include partial performance, resuming performance after a period of delay (if still of some value), or taking alternative actions to achieve some or all of the ultimate intended goal of the contract. Further, even if not expressly required, parties should always consider mitigation, inasmuch as the law of some jurisdictions will impose such a requirement and it will reduce the amount in controversy in the dispute.
* Alternative Dispute Resolution
The force majeure clause, or some other applicable provision of the contract, might require the parties to resolve a dispute regarding whether a force majeure event has occurred, or a dispute regarding the consequences of a triggering event, by engaging in mediation and/or arbitration. It is important to follow such requirements, particularly if the contract provides that a party loses rights by ignoring the agreed dispute resolution procedures.
* Other Required Actions
Depending on the purpose of the contract, there are any number of other specific actions a force majeure clause might require as a condition of excusing or delaying performance. Ongoing reporting and due diligence regarding potential alternatives to performance could be required. Good faith negotiation of an amendment to the contract could be required. Providing specific types of evidence proving impossibility of performance could be required. Any such required actions should be taken to avoid the risk of a determination that the right to excuse performance was lost through noncompliance with the contract terms.
Further Considerations and Recommendations
In making the assessments and taking the actions discussed above, we strongly urge consultation with experienced counsel. As part of that consultation, we recommend the following:
* Diligently monitor government actions, as new decisions may be made that change the analysis as to whether a force majeure event has occurred in relation to a particular contract.
* Assess the potential consequences of claiming a right not to perform.
* Consider making a good faith attempt to either perform or to take other steps to achieve the contract’s goal.
* If excused performance will be claimed under a force majeure clause, make sure to take all actions the contract requires as conditions of excusing performance, such as giving timely notice, mitigating damages, and following any dispute resolution procedures.
* Create and keep detailed evidence proving that the pandemic made performance impossible, commercially impracticable, or commercially unreasonable (depending on the standard required under the force majeure clause).
* Create and keep detailed evidence regarding efforts made to find alternative means of performing; communications with other contracting parties; and financial impacts, costs, and other losses incurred.
* Review all insurance policies for business interruption coverage, coverage for losses resulting from actions by government “civil authority,” or other potentially applicable coverage. Determining coverage can be quite complicated and qualified counsel should be consulted. This determination should be made as soon as possible because it may inform the decision on whether to claim excused performance under force majeure clauses. For purposes of future protection, work with counsel and your insurance broker on strengthening coverage for future events of this type.
* When other businesses contact you to claim their performance is excused, consider renegotiation on terms that are reasonable given the situation. If warranted, point out ways the other business could still perform or reasonable alternatives it could take in mitigation.
* Work with counsel to ensure future contracts have force majeure clauses specifically including communicable disease outbreaks, endemics, and pandemics, and clear terms addressing the parties’ rights and obligations, and applicable procedures after a triggering event. In the context of construction project contracts, for example, the force majeure clause should specifically address and allocate the burdens resulting from the unexpected delays and costs, state limits on the remedies available to each party, and dictate the steps the parties must take to get performance back on track as soon as the threat has passed.
“Epidemic” Is an Excusable Delay on Federal Contracts
Lastly, for our contractor and surety clients engaged in the federal contracting business with the United States of America, be aware that Federal Acquisition Regulation (“FAR”) § 52.249-14 provides that a “Contractor shall not be in default because of any failure to perform this contract under its terms if the failure arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of these causes are (5) epidemics, (6) quarantine restrictions . . . . In each instance, the failure to perform must be beyond the control and without the fault or negligence of the Contractor.” The coronavirus pandemic fits squarely within FAR § 52.249-14. See also FAR § 52.249-10. Make sure you give notice to the government and make efforts to mitigate damages and document problems.
Register for the upcoming NASBP Virtual Seminar presented by Robert Niesley and Colin Holley on this topic on April 1, 2020 at 2 p.m. Eastern time. Registration is $89 for members and $179 for non-members or you can get the NASBP 2020 Virtual Seminar Annual Subscription, and see every Virtual Seminar this year.
Robert C. Niesley is a Senior Partner at Watt Tieder Hoffar & Fitzgerald, and focuses his practice in the areas of construction and suretyship. He has successfully tried cases in state court, federal court, bankruptcy court, the U.S. Court of Federal Claims, and various arbitration forums. He can be reached at email@example.com or 949.852.6700.
Collin C. Holley is Partner at Watt Tieder Hoffar & Fitgerald, his practice focuses on the litigation of complex business disputes for clients in a broad range of industries, including construction and real estate. He handles matters involving contract disputes, real property, unfair competition, intellectual property, and trade secret misappropriation. He can be reached at firstname.lastname@example.org or 949.852.6700.