FORCE MAJEURE PROVISIONS DURING THE COVID-19 PANDEMIC
The Coronavirus (COVID – 19) is outbreaking across the globe. There are more than 500,000 positive cases in the world. On March 11, 2020, the World Health Organization (WHO) declared the Coronavirus outbreak a pandemic.[1]
Businesses are being shut down, and employees are encouraged to self-quarantine as a measure to slow down the spears of the virus. As a result, many businesses’ ability to perform under contracts are affected, and they wonder if they could invoke the force majeure clause to excuse performance or to discharge their liabilities. This article introduces what is force majeure provision, what to do if the contracts are affected by the COVID – 19, and other options to consider.
What is Force Majeure
A force majeure is an event beyond the control of the parties that prevent performance under a contract and may excuse performance.[2] The event must be one that can be neither foresaw nor controlled that may arise from acts of nature (e.g., floods, hurricanes) or of people (e.g., riots, strikes, war).[3]
A force majeure clause in a contract excuses non-performance when circumstances beyond the control of the parties prevent performance.[4] The clause excuses non-performance if specified circumstances beyond the parties’ control impact performance. Id. When a specified force majeure event occurs, the effect is that both parties are excused from further performance.[5]
The party claiming a force majeure event excused its performance has the burden to establish force majeure applies.[6] Also, the non-performing party must demonstrate its efforts to perform its contractual duties despite the occurrence of the event that it claims constituted force majeure.[7] In addition, the clause may require a party to give prompt notice of the occurrence of a force majeure event and may obligate the claiming party to take reasonable steps to mitigate the impact.[8] Keep in mind that, if the parties’ integrated agreement does not contain a force majeure clause, there is no basis for a force majeure defense.[9]
When considering the scope of the force majeure clauses, the court held that it must be narrowly construed and “only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused.”[10] Only in such circumstances can a party’s performance be excused. Mere impracticability of, or unanticipated difficulty in, performance is insufficient to excuse performance under a force majeure clause.[11]
What to do if the contracts are affected by the COVID – 19 outbreak
Due to the unanticipated disaster, it is best for businesses to take affirmative actions avoiding the potential damages. But what to do if the ability to perform under the contracts is affected by the COVID – 19? When considering whether to invoke the force majeure clause, the non-performing party should think:
Is there a force majeure clause in the contract?
Businesses cannot successfully invoke force majeure defense if the force majeure clause is not contained in the integrated agreement.
Which jurisdiction governs the contract?
Different jurisdiction has different applicable laws. Some of the law are more lenient than others. For example, under New York law, the courts would consider whether there is a practice in the industry to excuse performance on the basis of the claimed force majeure event that has such regularity of observance as to justify an expectation of its observance.[12] Be sure to check the right jurisdiction and right applicable law.
Is the clause language written broadly? How does it define the force majeure events?
The force majeure clauses must be narrowly construed. If the force majeure language contains an expansive phrase, the courts would use ejusdem generis (latin “of the same kind”) doctrine to make sure that the general words are not to be given an expansive meaning but be confined to things of the same kind and nature as the particular matters mentioned.[13]
Is the COVID – 19 really the reason of non-performing?
The force majeure kicks in only if the events that specifically stated in the force majeure clause is the actual reason that cause the contractual party fail to perform under the contract.
Whether the prompt notice is sent?
If the contracts provide that the prompt notice must be sent to the other party to trigger the force majeure clause, failure to do so would affect the enforceability of the clause.
Has the mitigating method been used?
Parties generally have the obligation to mitigate the impact. Failure to do so would probably also affect the enforceability of the force majeure clause.
Other options to consider
Where the force majeure clause cannot protect the non-performing party, there are some other options for the party to consider.
Impossibility
Impossibility defense excuses a party’s performance when extreme circumstances rendered party impossible to perform under the contracts. Generally, impossibility executes a party’s performance only if: (1) the performance is objectively impossible; (2) performance is rendered impossibly by an act of god; and (3) the events must be unforeseeable and not guarded against in the contract.[14]
Impracticability
Like the impossibility defense, impracticability defense can also discharge the obligation to perform. The party claiming the impracticability defense has the burden to prove that the event is: (1) unforeseeable; (2) the party asserting the defense must not have caused this event; and (3) the unforeseen even must alter the essential nature of the parties’ agreement. [15]
Frustration of purpose
If unforeseeable events occurred that would render the contract valueless to one party, the party can use frustration of purpose as defense. The events must be substantially frustrating the purpose which destroy the circumstances that constituted the foundation for the entire contract have ceased to exist. Party cannot use frustration of purpose as defense when the events are foreseeable or was caused by the party asserting the defense.[16] Also, frustration of purpose is no defense where the contract did not provide safeguards for a reasonably foreseeable event.[17]
Conclusion
The COVID – 19 outbreak is a disaster for human beings all over the world, and of course, businesses too. Many companies are unable to perform under their contracts. It is worth attention that, even if the businesses want to invoke force majeure, impossibility, impracticability, or frustration of purpose, the courts’ decision on whether those provisions can be enforceable are fact-based. Thus, businesses trying to enforce the provisions should review the contracts carefully, look into the specific language in the contracts, and consider the applicable law and jurisdictions.
Thanks to Ziyi Gao, 2d year law student at Touro College Jacob D. Fuchsberg Law Center for her assistance with research and drafting this article.
[2] Beardslee v. Inflection Energy, LLC, 25 N.Y.3d 150, 154 (2015).
[3] Black’s Law Dictionary (10th ed.).
[4] Harriscom Sveska, AB v. Harris Corp., 3F.3d 576, 580 (2d Cir. 1993).
[5] PT Kaltim Prima Coal v. AES Barbers Point, Inc., 180 F. Supp. 2d 475, 482 (S.D.N.Y. 2001).
[6] Aukema v. Chesapeake Appalachia, LLC, 904 F. Supp. 2d 199, 210 (N.D.N.Y. 2012).
[7] Phillips Puerto Rico Core, Inc. v. Tradax Petroleum Ltd., 782 F.2d 314, 319 (2d Cir. 1985).
[8] See note 5, supra.
[9] See General Elec. Co. v. Metals Resources Group Ltd., 293 A.D.2d 417 (1st Dept. 2002) (holding that the force majeure doctrine did not help the defendant to excuse performance because the integrated agreement contained no force majeure provision).
[10] Reade v. Stoneybrook Realty, LLC, 63 A.D. 3d 433, 434 (1st Dept. 2009).
[11] Phibro Energy, Inc. v. Empresa De Polímeros De Sines Sarl, 720 F. Supp. 312, 318 (S.D.N.Y. 1989).
[12] Mitsubishi Intern Corp. v. Interstate Chemical Corp., 2008 WL 2139137 (S.D.N.Y. 2008).
[13] Team Marketing USA Corp. v. Power Pact, LLC, 41 A.D. 3d 939 (3d Dept. 2007)
[14] 28A N.Y. Prac., Contract Law § 20:2.
[15] 28A N.Y. Prac., Contract Law § 20:11
[16] 28A N.Y. Prac., Contract Law § 20:18
[17] Frenchman & Sweet, Inc. v. Philco Discount Corp., 21 A.D.2d 180 (4th Dept. 1964)
