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COVID 19 Factors and Force Majeure in Contracts

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COVID 19 Factors and Force Majeure in Contracts GEORGE MASON AMERICAN INN OF COURT COVID-19 Factors and Force Majeure in Contracts January 19, 2019 Team Members: Michelle West, Esq. Jason Greave, Esq. Amy Bradley, Esq. Jeff Romanick, Esq. Charles de Azagra (Student Member) Chapman Good (Student Member) Kevin Case (Student Member) Force Majeure Clauses in the Time of Covid-19 I. What is Force Majeure? Force majeure is a superior or irresistible force that makes performance of contractual obligations difficult, delayed, or impossible. A force majeure event can potentially absolve one or both parties of some or all performance under their agreement. Force majeure provisions commonly require that the event be an unforeseeable one outside the parties’ control. The Virginia Code only a handful of definitions of force majeure. Virginia’s statute governing cable systems, Va. Code § 15.2-2108.19, defines force majeure as: an event or events reasonably beyond the ability of the cable operator to anticipate and control. "Force majeure" includes, but is not limited to, acts of God, incidences of terrorism, war or riots, labor strikes or civil disturbances, floods, earthquakes, fire, explosions, epidemics, hurricanes, tornadoes, governmental actions and restrictions, work delays caused by waiting for utility providers to service or monitor or provide access to utility poles to which the cable operator's facilities are attached or to be attached or conduits in which the cable operator's facilities are located or to be located, and unavailability of materials or qualified labor to perform the work necessary. Virginia Title 44 governing Military and Emergency Laws defines a “disaster” as including a “communicable disease of public health threat.” Va. Code § 44-146.16. The Insurance Title of the Virginia Code also includes an epidemic as part of its definition of a casualty event. Va. Code § 38.2-111(A)(5). Rather than strictly relying on the few definitions of 2 force majeure events that appear in the Virginia Code, Virginia courts defer to the clear and unambiguous bargained-for terms in individual contracts. See D.C. McClain, Inc. v. Arlington County, 249 Va. 131, 135 (1995) (holding that “It is the duty of the court, not the jury, to interpret a contract when its terms are clear and unambiguous.”) In Virginia, contract is king, and courts will look to the specific language of any force majeure clause to determine its scope, foreseeability requirements, notice requirements, and available remedies. Virginia courts have held repeatedly that parties to a contract can assess the risk inherent to the provisions of the contract, and are loathe to reform or rescind contracts. See Coady v. Strategic Resources, Inc., 258 Va. 12, 17 (1999). Parties to contracts in Virginia are free to define force majeure clauses more narrowly or more broadly as befits the particular contract and should expect the court to uphold those clear and unambiguous terms as written. Because Virginia courts rely upon the contract language in any dispute involving force majeure clauses, few bright line rules governing enforcement or remedies exist because each analysis is unique to the court’s interpretation of the underlying contract. Even fewer holdings exist for cases citing the novel coronavirus pandemic as a force majeure because with courts either shut down or at limited capacity, particularly for civil cases, Virginia trial courts and certainly appellate courts have yet to render many reported decisions. Therefore, we must look to Virginia’s view of force majeure clauses generally to anticipate coming decisions specific to the pandemic. II. Force Majeure clauses in Private Contracts Private contracts are not required to have a force majeure clause. If a contract does not contain such a clause, a court will not usually create one, relying on the parties to know what they have bargained for and trusting them to assess the risk of not including a force majeure clause. Contracts that do contain force majeure clauses can (and should) specify events or classes 3 of events that constitute force majeure. Pandemics or epidemics are often named as a qualifying event. Virginia courts enforce force majeure clauses only when it is proven, by a preponderance of the evidence, that the force majeure is the sole proximate cause of non-performance, and the party invoking force majeure could not have taken measures to avoid or minimize the effect of the force majeure event. See United States v. Hampton Roads Sanitation Dep’t, 2012 WL 1109030 at *7 (2012) (unpublished). Courts also tend to require that a force majeure event be unforeseeable. In the Hampton Roads case, the court examined the following force majeure clause: “Force Majeure” for purposes of this Consent Decree, is defined as any event arising from causes beyond the control of HRSD ... that delays or prevents the performance of any obligation under this Consent Decree despite HRSD's ... best efforts to fulfill the obligation. The court found that while foreseeability was not expressly mentioned, the clause required the Party’s “best efforts to fulfill the obligation,” which would necessarily include its best efforts to foresee problems. Id. at *8. The court thus found an implied foreseeability and mitigation component within the force majeure clause. After implying these requirements, the court held that the weather events claimed as force majeure were not of a type that were out of the ordinary for the area and were foreseeable. That foreseeability foreclosed a series of storms as force majeure event. The court held that these kinds of storms were expected and should have been prepared for and mitigated against. Virginia courts have declined to excuse performance when negligence was at least one proximate cause of non-performance. See Gordonsville Energy, L.P. v. Va. Elec. & Power Co., 257 Va. 344, (1999). See also Middle E. Broad. Networks, 2015 WL 4571178, at *4-5 (E.D. Va. 4 July 28, 2015) (unpublished) (finding the Party’s negligence in paying a supplier was a proximate cause of non-performance rather than interference from ISIS). In other words, to invoke a force majeure clause to excuse performance, the party must not have contributed to the reason for non-performance. In a current case pending in the U.S. District Court for the Central District of California, the parties are arguing this same issue where a party is claiming COVID- 19 has prevented it from making payment while the adverse party asserts that payments have been late and insufficient since 2018, long before COVID-19, making the company’s long-term delinquency the culprit rather than the pandemic alone. G&H Diversified Manufacturing LP v. Regreen Technologies, Inc. et al., case number 8:21-cv-00062 (U.S. District Court for the Central District of California). In Cooper v. Horn, 248 Va. 417, 448 (1994) the Virginia Supreme Court examined the effect of flooding due to a dam that burst. It held that because the dam failed as a result of ineffective care. Because negligence in maintaining the dam was at least one proximate cause of the flood, the force majeure clause was not activated as it was not the sole proximate cause of the damage and did not relieve the contracting parties of their obligations. Virginia courts also enforce notice requirements to invoke a force majeure clause and construe such notice provisions strictly as a condition precedent. See Old Dominion Electric Cooperative v. Ragnar Benson, Inc., 2006 WL 2854444 at *58 (E.D. Va., Aug. 4, 2006) (unpublished) (finding the party waived force majeure for failure to give notice of what it asserted were qualifying weather events); see also CMA CGM S.A. v, Leader Int’l Express Corp., 2020 WL 4249705, at *7 (E.D. Va. July 23, 2020) (unpublished) (declining to enforce a force majeure clause when the party gave no notice as required by the contract that its goods were retained by customs). 5 While force majeure clauses can include virtually any uncontrollable and unforeseeable event, an example of a more detailed clause that includes foreseeability and notice provisions follows: FORCE MAJEURE. Neither Party will be liable for any failure or delay in performing an obligation under this Agreement that is due to any of the following causes, to the extent beyond its reasonable control: reasonably unforeseeable acts of God, accident, riots, war, terrorist act, epidemic, pandemic, quarantine, civil commotion, breakdown of communication facilities, breakdown of web host, breakdown of internet service provider, natural catastrophes, governmental acts or omissions, changes in laws or regulations, national strikes, fire, explosion, generalized lack of availability of raw materials or energy. For the avoidance of doubt, Force Majeure shall not include (a) financial distress nor the inability of either party to make a profit or avoid a financial loss, (b) changes in market prices or conditions, or (c) a party's financial inability to perform its obligations hereunder. The Party claiming a force majeure event must notify all other Parties in writing within 24 hours of the qualifying event. Such notice shall include specific explanations of the event, its effect on the Party’s obligations under the Contract, and mitigating actions taken. Failure of proper notice waives any claim under this provision. III. Government Contracts a. The FAR (Federal Acquisitions Regulations) defines Force Majeure as Federal Acquisition Regulation Section 52.249-14. ConsensusDocs 200, Section 6.3 states in part: DELAYS AND EXTENSIONS OF TIME. (1) If Constructor is delayed at any
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