Seven Case Law Lessons Regarding Force Majeure and COVID-19

Seven Case Law Lessons regarding Force Majeure and COVID-19 Go to: Background | Excusing Performance | Lesson One – Express Provisions of the Contract | Lesson Two – Supervening Circumstances | Lesson Three – Market Fluctuations | Lesson Four – Temporary Disability | Lesson Five – Partial Disability | Lesson Six – Proving Diligence and Good Faith | Lesson Seven – Limited Certainty | Related Content Current as of: 05/19/2020 by Timothy Murray, Murray, Hogue & Lannis Rather than present a generic laundry list of black letter legal principles, this article posits seven critical lessons that every lawyer should consider in tackling force majeure and COVID-19. It will show that the judicial precedents dealing with past force majeure events provide context and perspective for the current pandemic, in each case contemplating specific circumstances that, if ignored, could lead to perilous results. Background There is a veritable pandemic raging, and I am not referring to COVID-19. It is a pandemic of webinars and legal articles about force majeure and COVID-19. Sadly, no lawyer is immune from it. In force majeure article after article, we are told that the COVID-19 pandemic is unprecedented, but the only thing unprecedented may be the use of the word itself. In fact, there is nothing novel about the novel coronavirus—at least so far as contract law is concerned. Certainly, the scope of the federal and state governments' shutdown of businesses has been unprecedented, causing massive disruptions to the supply chain, prompting innumerable commercial tenants to declare force majeure on their rental obligations, and impelling parties to back out of all manner of deals due to economic uncertainty. But contracts are disrupted by force majeure events of all kinds, and we will not have to wait until the COVID-19 cases meander their way through the judicial process to predict what the law will look like after it is all over. There is nothing about the pandemic that is going to shake the sturdy foundations of contract law. One of the changes we should expect is a COVID-19-inspired term in force majeure clauses—perhaps one that mentions pandemics, epidemics, or viral outbreaks or similar terms, just as terrorism became a standard term in force majeure provisions after the September 11 terrorist attacks, and earthquakes became a standard term after the 1989 Loma Prieta quake. See Lisa Girion, Businesses Seek a Legal Escape From Terrorism, Los Angeles Times, Oct. 14, 2001, at C1. Otherwise, force majeure clauses will still be interpreted and construed the way they are now, and the doctrines of impracticability, impossibility, and frustration of purpose will not change. And, yes, there will still be handshake deals, but perhaps without the actual handshaking. Excusing Performance First, it is important to ensure that we share the same underlying premises. Excusing a party from its contractual obligations for a force majeure event is the exception. Contract liability is strict liability. It is an accepted maxim that pacta sunt servanda, contracts are to be kept. The obligor is therefore liable in damages for breach of contract even if he is without fault and even if circumstances have made the contract more burdensome or less desirable than he had anticipated. See Restatement (Second) of Contracts, Ch. 11, Introductory Note. But when a post-contract formation supervening event occurs, sometimes performance is excused. The principal legal bases for excusing performance are discussed below. Page 2 of 8 Seven Case Law Lessons regarding Force Majeure and COVID-19 Impossibility/Impracticability The law of impossibility, dating from the mid-19th century, required literal impossibility to excuse a party's performance (e.g., death of the promisor or destruction of the subject matter). Contracting parties sought to skirt the harsh doctrine by adding force majeure clauses to their agreements that expanded the reasons to be excused from performance. Under modern contract law, impossibility has morphed into impracticability in many states, and under the modern rule, literal impossibility is no longer required. Impracticability is described in many ways, but essentially it is when a party is excused of its responsibilities because: • Performance has been made excessively burdensome—impracticable, not necessarily impossible—by a supervening event • The event must not have been caused by the party seeking to be excused • The event must be inconsistent with a basic assumption of the parties at the time the contract was made (instead of basic assumption, some cases, especially older cases, say that there is an implied term of the contract that the supervening event will not occur) • The supervening event must be, in some sense, unforeseeable, but not inconceivable (see Specialty Tires of Am., Inc. v. CIT Group/Equipment Fin., Inc., 82 F. Supp. 2d 434, 438–39 (W.D. Pa. 2000)), in the sense that it must have been so unlikely to occur that a reasonable party would not have guarded against it in the contract • The party seeking to be excused of its obligation to perform must not have expressly or impliedly agreed to perform despite the event and that it did not assume the risk of it Not all states accept the modern trend, and even in some states that do, courts sometimes still call it impossibility. See City of Starkville v. 4-County Elec. Power Ass'n, 819 So. 2d 1216, 1224 (Miss. 2002). The UCC has adopted the more progressive impracticability standard. See U.C.C. § 2-615. Frustration of Purpose The other extra-contractual defense is frustration of purpose. This aptly named doctrine focuses on the parties' purpose in making their contract and has nothing to do with a party's inability to perform. It applies where a supervening event fundamentally changes the nature of a contract and makes one party's performance worthless to the other. The best explanation for it is an example. In the landmark case of Krell v. Henry 2 K.B. 740 (1903), Henry rented a room from Krell for the purpose of viewing the coronation of King Edward VII. But the king fell ill, and the coronation was postponed. The very purpose of the contract—a room with a view of the coronation—was frustrated, and performance was excused. In the wake of COVID-19, innumerable events around the world were postponed or cancelled. Every cancellation might affect other contracts. A simple frustration of purpose example: suppose a vendor rented a booth to sell T- shirts next to a large venue where a major sporting event was supposed to occur, but the sporting event is canceled due to COVID-19. The very purpose of the vendor's contract was to capitalize on the major event, and the contract makes no sense without it. The question is, was the occurrence of the major event a basic assumption of the parties to the vendor's rental contract? Force Majeure Clauses in Contracts Parties generally can allocate the risks in their contract in whatever manner they choose. The contract—not extra- contractual legal bases such as impracticability—is the starting point for discovering whether a post-formation supervening event excuses performance. If . the parties include a force majeure clause in the contract, the clause supersedes the [impossibility] doctrine . [L]ike most contract doctrines, the doctrine of impossibility is an “off-the-rack” provision that Page 3 of 8 Seven Case Law Lessons regarding Force Majeure and COVID-19 governs only if the parties have not drafted a specific assignment of the risk otherwise assigned by the provision. See Commonwealth Edison Co. v. Allied-General Nuclear Services, 731 F. Supp. 850, 855 (N.D. Ill. 1990). Most courts seem to agree that “[w]hen parties specify certain force majeure events, there is no need to show that the occurrence of such an event was unforeseeable.” See TEC Olmos, LLC v. Conocophillips Co., 555 S.W.3d 176, 183 (Tex. App. 2018). When the event is not specifically listed but a party seeks to rely on the catchall provision of a force majeure provision (e.g., “any other cause not enumerated herein but which is beyond the reasonable control of the party whose performance is affected”), it has been held that the event that purportedly falls within the catchall must be unforeseeable. See TEC Olmos, LLC v. Conocophillips Co., 555 S.W.3d 176 (Tex. App. 2018). Lesson One – Express Provisions of the Contract The express provisions of the contract, not extra-contractual defenses, generally will determine whether a party can be excused of its contractual obligations. If the parties expressly allocated the risks in their contract, that allocation generally will govern the parties' rights as to that risk. If a contract spells out government action as a force majeure event, the party seeking to be excused probably will have a good argument that delays in its performance directly caused by a government-mandated closure are excused. Two important examples of likely scenarios we will see in the aftermath of COVID-19 are discussed below. Case Study – Commercial Tenant Seeking to Be Excused from Paying Rent The government shutdowns in the wake of the COVID-19 outbreak caused innumerable commercial tenants to seek to be excused from rent and other payment obligations. In commercial leases that contain force majeure clauses, it is common to make clear that the obligation to pay rent is not excused by the occurrence of a force majeure event. In 476 Grand, LLC v. Dodge of Englewood, Inc., 2012 N.J. Super. Unpub. LEXIS 457 (Mar. 2, 2012), the plaintiff landlord and defendant car dealer entered into a five-year lease that contained a force majeure provision that included this sentence: “Nothing herein shall be deemed to relieve Tenant of its obligation to pay Rent when due.” The court refused to entertain defendant's extra-contractual defenses of impracticability and frustration of purpose.

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