Contract Performance During COVID-19 Force Majeure, Acts of God, and the Impossibility of Performance

Home , Act of God, Force majeure, Impossibility

FEATURE || TITLEENVIRONMENTALCONTRACT LAW LAW

Contract Performance during COVID-19 Force Majeure, Acts of God, and the Impossibility of Performance

BY MIKE CROSS

22 || COLORADOCOLORADO LAWYERLAWYER || JULYJULY 2020 This article discusses how force majeure provisions and common law defenses may operate to excuse contract performance during the COVID-19 pandemic.

s the COVID-19 pan- that excuse performance in whole, in demic derails and part, or only temporarily, depending disrupts industries “ on the language and the circum- throughout the world, stances. Parties to a contract can partiesA find themselves flipping to Often, our most negotiate and include any number of the back of their lengthy contracts to important failure is specific scenarios, including events dust off an often included and more that are foreseeable and within the often ignored provision: the force one of imagination. parties’ control.4 majeure clause. But will they find Even where a force majeure salvation there? How will courts in- For that reason, clause does not explicitly include terpret force majeure clauses in the most force majeure the claimed event, it may still pro- new world shaped by the COVID-19 vide relief, because the inability to pandemic? And how should parties clauses contain a foresee the occurrence of a force move forward? majeure event is a fundamental ‘catchall’ provision, rationale for the clause. Often, our What Constitutes most important failure is one of Force Majeure? such as ‘any imagination. For that reason, most The French term “force majeure” other emergency force majeure clauses contain a translates literally to “superior “catchall” provision, such as “any strength.” Black’s Law Dictionary beyond the parties’ other emergency beyond the parties’ defines the concept as an “event or control, making it inadvisable, ille- effect that can neither be anticipat- control, making it gal, or impossible to perform their ed nor controlled” that “prevents inadvisable, illegal, obligations under this Agreement.”5 someone from doing something that As one can imagine, these provi- he or she had agreed or officially or impossible to sions generate most of the litigation planned to do.”1 Many contracts relating to force majeure clauses. contain force majeure clauses perform their For example, in 2008 Donald Trump excusing performance under such obligations under filed an action claiming that the unanticipated circumstances. “biggest depression we have had The term force majeure is often this Agreement.’ in this country since 1929” consti- conflated with the phrase “act of tuted an “event or circumstance not God.” They have different meanings within the reasonable control of the and scope. An “act of God,” or vis borrower” in an attempt to escape major, is an extraordinary and a $40 million personal guaranty (he uncontrollable natural disaster or ” also sought $3 billion for damage to irresistible “superhuman” cause that his reputation).6 impedes performance.2 Force majeure clauses in contracts typically excuse performance under such circumstances. Construing the Clause But force majeure clauses often go further by including a When construing force majeure clauses, the question, ulti- comprehensive “parade of horribles,”3 natural and unnatural, mately, is what situations did the parties intend to constitute

JULY 2020 | COLORADO LAWYER | 23 FEATURE | TITLECONTRACT LAW

an excuse for performance? For guidance, courts a pandemic exists “of the same general kind or there are waves, does a trough qualify? What often rely on the doctrine of ejusdem generis, class” as those events specifically identified. happens if the governor has opened the state which holds that when “general words follow Even under non-pandemic circumstances, for business but a party refuses to perform for an enumeration of two or more things, they there is plenty of room for argument about safety considerations? apply only to . . . things of the same general whether a force majeure clause applies. Con- A war begins with a declaration and ends kind or class specifically.”7 Courts interpret sidering the widespread losses caused by the with an armistice. Hurricanes, tornadoes, these provisions narrowly and are reluctant to COVID-19 pandemic, a considerable amount and wildfires are readily identifiable. But the give the general words of the catchall provision COVID-19 pandemic is amorphous, and the expansive meaning.8 breadth of its impact might not be apparent for Most courts have held that economic hard- years to come. Nevertheless, legal obligations ship alone does not qualify.9 For instance, courts persist and must be evaluated. have rejected attempts to invoke force majeure clauses in response to the 1986 collapse of the “ Force Majeure Pitfalls crude oil market,10 the “worldwide economic To determine Most force majeure clauses contain strict notice meltdown” of the Great Recession,11 and the provisions16 that a party must follow to the “trade war” with China, involving tariffs and whether the letter. Even in the absence of specific notice allegations of Chinese market manipulation.12 COVID-19 requirements, a party should provide immediate Unprofitability alone is usually insufficient, notice of, and continuous updates on, a contract especially in sales contracts where price pandemic impediment. The notice requirement’s purpose fluctuations are common and a party may is to allow the other party to make alternative be unwilling, but not “unable,” to perform.13 constitutes a force arrangements and mitigate the impact of the However, this does not preclude the parties nonperformance. Delayed notice, especially from specifically stating in the force majeure majeure event if provided for the first time after the deadline clause that changing economic conditions sufficient to excuse to perform has expired, may result in waiver of such as market collapse, price fluctuations, or performance rights.17 recession excuse performance.14 performance, the Additionally, a party must attempt to overcome an impediment to performance. If The COVID-19 Effect starting point is alternative avenues of performance exist, those To determine whether the COVID-19 pandemic the enumerated must be explored, even if such options increase constitutes a force majeure event sufficient to a party’s costs.18 A party seeking to be excused excuse performance, the starting point is the horribles. While must demonstrate that, despite skill, diligence, enumerated horribles. While not common, the and good faith, performance remains impossible terms “pandemic” and “epidemic” do appear in not common, the or unreasonably expensive.19 Difficulty is not the many such clauses. For instance, after canceling terms ‘pandemic’ same as impossibility. For example, while the the remainder of its season, it did not take long Ebola virus was ravaging West Africa in 2014, for the NBA to locate the term “epidemic” in the and ‘epidemic’ do Morocco invoked a force majeure provision to force majeure clause of its collective bargaining unilaterally withdraw from hosting the African agreement and start proposing player salary appear in many Cup of Nations. The African Confederation of reductions.15 such clauses. Football (CAF) rejected the move, concluding Even if those terms are not explicitly includ- that while performance was “difficult” due to ed, others might qualify, such as “government the need to impose comprehensive sanitation regulation,” “supply disruption,” or “regulatory procedures for spectators, performance was action.” Such terms are often included in force possible, as ultimately proven by the replace- majeure clauses and could excuse performance ” ment host. The CAF fined Morocco and banned where the pandemic or the reaction to the the nation from participating in the next two pandemic prevents performance. For example, of litigation is likely to occur on whether the tournaments.20 a company’s inability to perform may be caused nonperformance that caused these losses is by the State of Colorado’s stay-at-home order excusable. The unique complications of this Common Law Relief rather than its workforce contracting COVID-19. pandemic will exacerbate the analysis. When Even in the absence of a force majeure clause, re- In addition, a catchall provision may apply where did the pandemic start? When will it end? If lief may be found in common law defenses such

24 | COLORADO LAWYER | JULY 2020 as impossibility, impracticability, and frustration major natural disasters, wars, and strikes. political backgrounds, trying to determine of purpose. Impossibility does not mean literal or Counsel should use this opportunity to whether an “act of God,” as opposed to strict impossibility but includes “impracticability include more creative scenarios tailored local regulations, Donald Trump, or the because of extreme and unreasonable difficulty, to their clients’ needs. Chinese government, prevented a party expense, injury or loss involved.”21 Colorado has 3. Consider catchall language. The use of from performing. adopted the Restatement (Second) of Contracts, catchall language requires the balance of which requires a party relying on this defense certainty and risk. The less such language Conclusion to demonstrate that (1) a supervening event, is used, the lower the chance of ambiguity Force majeure clauses and the common law “either an act of God or an act of a third party,” and dispute. However, that comes at a cost. defenses of impossibility, impracticability, and made performance impracticable; (2) the non- Courts could rely on ejusdem generis, or frustration of purpose may provide companies occurrence of the event was a basic assumption the doctrine of expressio unius est ex- needed relief in this difficult economic environ- of the contract; (3) there was no fault; and clusio alterius—the expression of one ment created by the COVID-19 pandemic. Now (4) the party did not assume the risk of the thing is the exclusion of another26—to is the time to review these clauses and doctrines event’s occurrence.22 Additionally, Colorado’s limit relief to the enumerated horribles to determine how they might affect current Uniform Commercial Code excuses a seller and exclude similar events. A party can contracts, and plan for the future accordingly. from timely delivery of goods “if performance tailor the catchall provision to the desired as agreed has been made impracticable by the level of specificity. For example, in the occurrence of a contingency, the nonoccurrence Fifth Circuit, where the phrase “including of which was a basic assumption on which the but not limited to” preceded the parade Mike Cross is a partner with Ogborn Mihm LLP in Denver. He handles liti- contract was made, or by compliance in good of horribles, the court expansively inter- gation in business, construction, faith with any applicable foreign or domestic preted the catchall phrase to supersede personal injury, and medical devices governmental regulation or order whether or the doctrine of ejusdem generis.27 and products cases—mike.cross@ omtrial.com. not it later proves to be invalid.”23 Finally, the 4. Remove the phrase “act of God.” This doctrine of frustration of purpose may excuse a vague phrase not only creates uncertainty, Coordinating Editor: Mark Cohen, mark@ party in certain situations where the objectives which breeds litigation, but also opens a cohenslaw.com of the contract have been utterly defeated by can of worms. Imagine a jury, six different circumstances arising after the formation of the people with six different religious and agreement, such as the cancellation of an event or the destruction of a building by fire due to circumstances beyond the parties’ control.24

Drafting Tips Practitioners should consider the following tips when drafting contract provisions: 1. Include a force majeure clause. The similar common law doctrines are vague, subject to interpretation, and require factual analysis. A force majeure clause will supersede these defenses.25 Specifying the exact circumstances that excuse performance will allow parties to make confident decisions during times of uncertainty. 2. Draft a comprehensive parade of horribles. Parties can contractually agree to excuse performance under any defined circumstance. This can include foreseeable events if specifically included. Now, more than ever, a practitioner’s imagination should be expansive. Most force majeure provisions include standard events such as

JULY 2020 | COLORADO LAWYER | 25 FEATURE | TITLECONTRACT LAW

NOTES 1. Black’s Law Dictionary (Thomson Reuters 11th 10. Langham-Hill Petroleum, Inc. v. S. Fuels Co., 19. Williston on Contracts, supra note 2 at § ed. 2019). 813 F.2d 1327 (4th Cir. 1987). 77:31. 2. See Lord, 30 Williston on Contracts § 11. Route 6 Outparcels, LLC v. Ruby Tuesday, 20. See Arbitration CAS 2015/A/3920, FRMF v. 77:31 (Lawyers Coop. Publ’g 4th ed. 1993) Inc., 2010 WL 1945738 at *3–4 (N.Y. Sup.Ct. May CAF, Award of Nov. 17, 2015. (hereinafter Williston on Contracts); Pesando, 12, 2010). 21. Colo. Civ. Jury Instr. 30:23 (CLE in Colo., 1 Am. Jur. 2d Act of God § 1 (Lawyers Coop. 12. Kyocera Corp. v. Hemlock Semiconductor, Inc. 4th ed. 2019) (quoting City of Littleton v. Publ’g 2d ed. 2016) (hereinafter Am. Jur. 2d). LLC., 886 N.W.2d 445 (Mich.App. 2015). Emp’rs Fire Ins. Co., 453 P.2d 810, 812 (Colo. 3. See URI Cogeneration Partners, L.P. v. Bd. of 13. See, e.g., Sabine Corp. v. ONG W., Inc., 725 1969)). Governors, 915 F.Supp. 1267, 1287 (D.R.I. 1996). F.Supp. 1157 (W.D.Okla. 1989); Langham-Hill 22. Restatement (Second) of Contracts § 261 4. See, e.g., Perlman v. Pioneer Ltd. P’ship, 918 Petroleum, Inc., 813 F.2d 1327. (Am. Law Inst. 1981) (hereinafter Restatement). F.2d 1244 (5th Cir. 1990). 14. See, e.g., In re Old Carco LLC, 452 B.R. 100 23. CRS § 4-2-615(a). 5. See Williston on Contracts, supra note 2 at § (S.D.N.Y. 2011). 24. Restatement, supra note 22 at § 265. See 77:31. 15. Pickman, “Report: NBA, NBPA Discussing Beals v. Tri-B Assocs., 644 P.2d 78, 80–81 (Colo. 6. Norris, “Trump Sees Act of God in Possibility of Withholding Player Salaries,” App. 1982). Recession,” N.Y. Times (Dec. 4, 2008), Sports Illustrated (Mar. 31, 2020), https://www. 25. See Commonwealth Edison Co. v. Allied- https://www.nytimes.com/2008/12/05/ si.com/nba/2020/04/01/nba-nbpa-financial- General Nuclear Servs., 731 F.Supp. 850, 855–56 business/05norris.html. players-future. (N.D.Ill. 1990). 7. Scalia and Garner, Reading Law: The 16. Am. Jur. 2d, supra note 2 at § 13. 26. See Reale v. Bd. of Real Estate Appraisers, Interpretation of Legal Texts at 199 (West 2012). 17. See, e.g., Res. Inv. Corp. v. Enron Corp., 669 880 P.2d 1205, 1207 (Colo. 1994). 8. See, e.g., Kel Kim Corp. v. Cent. Markets, Inc., F.Supp. 1038, 1043–44 (D.Colo. 1987). 27. See, e.g., E. Air Lines, Inc. v. McDonnell 519 N.E.2d 295, 296–97 (N.Y.App. 1987). 18. See, e.g., Erickson v. Dart Oil and Gas Corp., Douglas Corp., 532 F.2d 957, 989 (5th Cir. 1976). 9. Williston on Contracts, supra note 2 at § 474 N.W.2d 150, 155 (Mich.App. 1991); Woods v. 77:31. Ratliff, 407 So. 2d 1375, 1379 (La.App. 1981).

CBA Find A Lawyer is now

T R U S T E D

We’ve added more categories and eased searchability so that your practice is more visible to a wider range of clients.

Be sure to log into LicensedLawyer.org/CO using your FindALawyer password to update your bio. Email [email protected] or call 303-860-1115, ext. 1 for questions and support.