and COVID-19

Not all “Acts of God” are Created Equal

Alec W. Farr

1 Force Majeure Clauses Generally

• Civil law concept written into . • A “force majeure” is an adverse event outside the control of the parties that prevents a party from fulfilling a . – Also called an “Act of God” clause • Purpose: to limit damages in a case where the reasonable expectation of the parties and the performance of the contract have been frustrated by circumstances beyond the parties’ control. • Generally only excuses performance if it renders performance impossible, not merely harder or more expensive. • Highly dependent on the specific language of the contract and the circumstances of the case -- one size does not fit all. 2 Force Majeure Clauses Generally

• Primary issue in determining whether a force majeure clause is applicable: does it list the specific type of event claimed, i.e. a “pandemic” or “epidemic”, as a force majeure event? • Force majeure clauses are interpreted narrowly. • Force majeure event must be the proximate cause of a party’s inability to perform. • The party seeking to invoke force majeure usually must show that it tried to perform.

3 Force Majeure Clauses Generally

• Most clauses include a general reference to “Acts of God” • What is an “Act of God”? • Usually means an event outside human control that is so extraordinary and unprecedented as to be unforeseeable. • Most often invoked in cases of natural disasters -- earthquakes, floods, extraordinary weather events, etc. • But not all “Acts of God” are necessarily unforeseeable events that will excuse performance of the contract. • Depends on the contract, the expectation of the parties and the circumstances.

4 Force Majeure Clauses Generally

• Many clauses also include general “catch all” language: – “…or any other causes of any kind whatsoever which are beyond the control of a party.” • Courts usually apply the rule of ejusdem generis and include “only those things of the same character or class as the specific events mentioned.” • General terms are not interpreted expansively.

5 Force Majeure Clauses Generally

• Typical force majeure clause in a lease:

– “Whenever a period of time is herein prescribed for action to be taken by Landlord or Tenant (except for the obligation of Tenant to pay the Monthly Rental Payments, Additional Rent or other sums due hereunder), then neither party shall be liable or responsible for, and there shall be excluded from the computation of any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the control of such party.”

6 Force Majeure Clauses Generally

• Absent specific contractual language, mere economic hardship is usually not sufficient, even if it was caused by events beyond a party’s control. – E.g., no force majeure where a party shuts down business voluntarily due to economic hardship caused by events beyond the party’s control that are not within force majeure definition. • While unpredictable, mere economic hardship is never completely “unforeseeable.” – Typical litigation posture: party invoking force majeure claims that the unforeseeable event prevents performance; party seeking performance argues that its “just economic hardship.”

7 Related Doctrines: of Performance

• If the contract has no applicable force majeure clause, there still may be legal defenses to performance. • Impossibility of Performance: excuses a party’s performance “only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible.” • Party usually must establish (1) the unexpected occurrence of an intervening act, (2) such occurrence was of such a character that its non-occurrence was a basic assumption of the agreement of the parties, and (3) that occurrence made performance impossible in practice. • Usually, “the financial inability of one of the contracting parties to meet the contract price is [not] an adequate ground upon which to grant rescission of a contract on the basis of impossibility of performance.”

8 Related Doctrines:

• Frustration of purpose: “a change in circumstances makes one party’s performance virtually worthless to the other, frustrating his purpose in making the contract.” • Elements of a frustration of purpose defense: (1) the contract must be at least partially executory; (2) the frustrated party's purpose in making the contract must have been known to both parties when the contract was made; (3) this purpose must have been frustrated by an event not reasonably foreseeable at the time the contract was made, the occurrence of which has not been due to the fault of the frustrated party and the risk of which was not assumed by him. • Generally: the frustration must be so severe that it is not fairly to be regarded as within the risks that the parties assumed under the contract. 9 Force Majeure and COVID-19

• No definitive guidance from courts yet on whether the COVID-19 pandemic itself constitutes force majeure, or whether government shut-down orders or regulations constitute force majeure. • Unclear whether COVID-19 is an “Act of God” – Courts have struggled with the definition of “Act of God” in other contexts (like weather events) • Will depend on the language of the contract and the specific impact of the pandemic and/or government actions9 on the parties.

10 COVID-19 – Practice Tips

• Is there a force majeure clause in the contract? • If there is one, is something like “pandemic,” “epidemic” “public health emergency” specifically listed? • If not, does the clause include “government action” or “regulation”? • If “Act of God” or a “catch-all” is all that applies, Courts will probably read that language narrowly. • What is the specific impact of the pandemic/government action on the parties and their contractual performance? – Is performance really “impossible” or is it just more difficult/costly to perform? • Is the pandemic/government action the proximate cause of the inability to perform? Or is it general “economic hardship?” • If no force majeure clause or it’s inapplicable, consider whether impossibility or frustration of purpose applies. • In all cases, force majeure is fact specific and subject to argument. 11 Alec W. Farr 1155 F Street, NW Washington, DC 20004 [email protected] 202-508-6053

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