A recent spate of government restrictions that have closed or limited nonessential businesses has raised a number of questions about how to reduce or shift the risks of closures in the future. There has been much written about contract provisions and defenses that may excuse performance, including force majeure clauses and the doctrines of impossibility of performance and frustration of purpose. This alert discusses the flip side — a contractual provision known as a “hell or high water” (HOHW) clause that may be employed, in certain circumstances, to compel a party to perform irrespective of the reason for the no-performance. The discussion in this article is not meant to be insensitive to the issues facing businesses. Instead, it seeks to provide information on a contract provision that must be considered when analyzing parties’ rights under contracts in today’s environment.
Although HOHW clauses are typically binding in commercial contracts negotiated by sophisticated parties, their enforceability is not absolute. Under certain circumstances, courts have excused performance notwithstanding the presence of an HOHW clause when some intentional or willful act by a party impairs the adverse party’s ability to obtain the benefit of its bargain under the contract. Contract drafters can use this guidance to hone the precision of these clauses, with an eye toward increased certainty if the clauses are ever invoked.
Some courts have restricted the effectiveness of HOHW clauses in instances of fraud or bad faith that prevents performance. Courts have found that permitting the hindering party to benefit from its intentional or willful wrongful act would violate public policy, and contracts that violate public policy are unenforceable. See, e.g., Equitex, Inc. v. Ungar, 60 P.3d 746, 750 (Colo. App. 2002).
Other courts have been more willing to sustain HOHW clauses when a nonperforming party claims impossibility or other circumstances that were not specifically identified in the contract, provided the contract language is broad enough to assign the risk of loss in unenumerated circumstances to the nonperforming party.
In General Electric Capital Corp. v. FPL Services Corp., 986 F. Supp. 2d 1029, 1036 (N.D. Iowa 2013), the Northern District of Iowa enforced a HOHW clause against a lessor of copiers whose equipment was damaged when Hurricane Sandy flooded FPL’s Long Island offices. The lease stated that “[FPL’s] payment obligations hereunder are absolute and unconditional and are not subject to cancellation, abatement, reduction, recoupment, defense or setoff for any reason whatsoever,” “[i]f any item of Equipment is lost, stolen or damaged . . . Rental Payments will continue to accrue without abatement,” and “[FPL is] responsible for loss and damage to the Equipment from any cause whatsoever on and after delivery thereof.” FPL challenged the HOHW clause, arguing that it could not have assumed the risk of loss because Hurricane Sandy was not reasonably foreseeable, and FPL could not have been expected to have insured against it. Rejecting that argument, the court concluded that “the contract explicitly assigns to FPL the risk of loss from ‘any cause whatsoever’ and requires FPL to make monthly payments regardless of whether the copiers get damaged.” Because the contract made FPL’s performance unconditional and assigned the risk of loss to FPL, FPL could not rely on supervening impracticability or frustration of purpose to discharge its performance.
As restrictions imposed in connection with COVID-19 continue, the negative impact on American businesses will likely increase. Many states and cities have encouraged or ordered nonessential businesses to close for a period of weeks or longer. As a result, company resources may be stretched thinner and thinner, and it may become difficult for businesses to perform under their contracts. Whether performance is excused will depend on the language of the particular agreement, the governing law, and the conduct of the parties with regard to whether the ability to obtain the benefit of the bargain was hindered.
As states continue to issue COVID-19 restrictions on a daily basis, the presence or absence of an HOHW clause may be crucial in contract disputes over whether performance is excused or required in the wake of the pandemic. Well-crafted HOHW clauses also may help parties allocate risks as part of their future contact negotiations.
