Miller Barondess Client Alert: Force Majeure in a Pandemic

Miller Barondess Client Alert: Force Majeure in a Pandemic

The world is rapidly adjusting to the “new normal” in the wake of the COVID-19 pandemic.  As of this writing, nearly a third of the world’s population is locked down in an effort to combat the spread of the virus.  As the dust settles, countless commercial arrangements are sure to be disrupted.  Here, we examine the contractual doctrine of force majeure as it applies to the pandemic.

Force Majeure

“Force majeure,” otherwise described as an “act of God,” is a contract provision that excuses performance where extraordinary circumstances prevent a party from fulfilling its contractual obligations.  The interference must not be the fault of the non-performing party and must be unpreventable despite the party’s exercise of all necessary diligence and care.[1]  Typical force majeure clauses include a list of specific events that are (1) beyond the reasonable control of the parties and (2) occur despite the parties’ exercise of necessary diligence and care.[2]   The types of events typically listed in a force majeure clause include war, acts of terrorism, national emergencies, government acts, labor strikes, and natural disasters.  The provisions may also include pandemics or epidemics.

Notably, in order to invoke force majeure, the non-performing party must show “that, in spite of skill, diligence and good faith on his part, performance became impossible or unreasonably expensive.”[3]  In practice, this requires a showing that a party’s performance was actually prevented or made effectively impossible by the event—circumstances that merely increase the difficulty of performance or make it economically burdensome will not suffice.  As with any contract dispute, the case will turn on the specific contract language and applicable law.

California Civil Code § 1511

Even if your contract does not contain a force majeure clause, you still may be able to use the doctrine.  The California Civil Code provides an implicit force majeure clause in every contract, whether or not the agreement contains an explicit provision.  Section 1511 excuses performance of a party’s obligations “when it is prevented or delayed . . . by the operation of law,” “by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States.”[4]  Accordingly, a party may be excused by force majeure even if the contract is silent on the matter.  The statute also allows parties to contract around its provisions if desired.[5]  To invoke section 1511, the non-performing party must show that (1) the force majeure event is responsible for its failure to perform and, (2) that the event was unforeseeable.[6]

Most courts will likely agree that the scope and affect of the current pandemic was unforeseeable.  The particular facts affecting a business will need to be examined to determine whether the Civil Code’s force majeure protection applies.

Force Majeure Clauses in Contracts

In the majority of cases, the underlying contract will contain a force majeure clause.  Courts in California typically review these clauses strictly, so that the provision does not “buffer a party against the normal risks of a contract”.[7]  Therefore the scope of the force majeure clause (i.e. whether COVID-19 can excuse performance) will depend on the specific language of the provision.

Courts will also give effect to agreements by the parties to narrow the scope of force majeure clauses or to excuse certain failures to perform from force majeure altogether.  Businesses should determine if their contracts contain such exclusions on force majeure, as these provisions could affect everything from rent to payroll.

In practice, if a force majeure clause explicitly includes terms such as “pandemic,” “disease,” “quarantine,” “national emergency,” or “act of government,” then courts will be likely to excuse contractual performance given the current circumstances.  Many force majeure clauses, however, employ broad, “catch-all” phrases in lieu of, or in addition to, specific events (such as “act of God” or “any other events or circumstances beyond the reasonable control of the party affected”).  Courts will typically interpret the scope of this broad language based on whether the pandemic was foreseeable at the time of contracting.[8]

Parties seeking relief from their contractual obligations may argue that while pandemics are conceivable, they are far from predictable as demonstrated by the seeming lack of preparedness of world governments and the global economy to the current pandemic.  Parties invoking force majeure could also cite the World Health Organization Director-General’s recent statements that “[w]e are in unchartered territory” and that the Organization has “never before seen a respiratory pathogen” like COVID-19 as proof that the current pandemic was not foreseeable at the time of contracting.  On the other hand, parties seeking to enforce contracts could argue that the recent outbreaks of SARS, H1N1, and Ebola and/or the now-common “virus” or “communicable disease” exclusion in insurance policies have made pandemics a foreseeable event that does not qualify as force majeure.

Conclusion

Businesses will need to assess their contractual obligations in light of the pandemic and the foregoing principles of force majeure in California.  As events unfold, it would be prudent to keep in mind:

  • Timing is key—was the contract entered into before or after declaration of the pandemic?[9] In general, contracts with force majeure clauses signed in the midst of the pandemic are less likely to be enforced.  For example, parties that entered contracts beginning in January 2020 will have greater difficulty arguing that the pandemic was not foreseeable at the time of contracting.
  • Provide prompt notice—a party seeking excusal from performance under force majeure is well advised to provide timely notice to the other party of their non-performance. Notice requirements are also often specified in the contract.  Parties should bear in mind that the wording of this notice can and will be scrutinized by the court in any subsequent litigation for breach of contract.
  • Take all steps reasonably practicable to mitigate or reduce the disruption of COVID-19 on performance. California imposes a general duty to mitigate damages.  Alternative performances should be considered in light of their relative burdens and costs.
  • Determine whether potential insurance coverage is available, such as business interruption insurance.

[1] Pac. Vegetable Oil Corp v. C.S.T., Ltd., 29 Cal. 2d 228, 238 (1946).

[2] Some courts have held that these requirements must be read into California force majeure clause even if not explicitly stated in the provision.  Watson Labs., Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099, 1110 (C.D. Cal. 2001) (“California law reads [those elements] into express force majeure clauses …”).

[3] Jin Rui Grp., Inc. v. Societe Kamel Bekdache & Fils S.A.L., 621 Fed. Appx. 511, 511 (9th Cir. 2015)

[4] Cal. Civ. Code § 1511.

[5] Cal. Civ. Code § 1511(2) (“… unless the parties have expressly agreed to the contrary”); see also Gray v. Bekins, 186 Cal. 389, 394 (1921) (interpreting section 1511’s listed excuses for non-performance in the disjunctive, thus implying that parties can contract around provisions in § 1511(1) and § 1511(2)).

[6] Glenn R. Sewell Sheet Metal, Inc. v. Loverde, 70 Cal. 2d 666, 678 (1969).

[7] Horsemen’s Benevolent & Protective Ass’n. v. Valley Racing Ass’n., 4 Cal. App. 4th 1538, 1565 (1992).

[8] United States v. Winstar Corp., 518 U.S. 839, 905-907 (1996).

[9] The World Health Organization issued its first guidance on the novel coronavirus on January 10, 2020 and declared it a global pandemic on March 11, 2020.