With the spread of COVID-19 and executive orders and other laws effectuating lockdowns, closures, and rules against multi-person assemblies, many entities are issuing notices claiming excuse for non-performance based on contractual force majeure clauses. This alert highlights essential factors to be considered before sending or responding to such notices, including the potential risk of misfiring on a legally deficient force majeure notice. The analysis becomes fact-intensive and dependent upon the choice of law and contract language. However, the basic principle is a constant: courts will hold parties to the contracts they made, and force majeure is an exception to that rule, excusing performance in whole or in part, forever or for a limited period, under its terms. Whether the event fits the terms becomes a primary source of contention. The following are general comments, in the form of a checklist, without attempting to cite all relevant cases, nuances, and exceptions from state to state.
1. Is there a contract and what does it say?
This may sound self-evident, but in many situations, there may be a question as to whether there is a written contract and if so, what the terms are, particularly where purchase orders and other communications, all with “terms and conditions” attached, may contradict each other in material ways. The Uniform Commercial Code (Article 2-615), as well as the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) (Article 79), have different approaches to this issue. In essence, if there is a contract but no force majeure clause, UCC Article 2-615 effectively acts as a statutory force majeure clause, as does Article 79 of the CISG. If there is a contract, and it has a force majeure provision, it may provide a time frame for notice, or for how long the event needs to occur, and other factors that will affect when notice may or may not be sent.
2. Whose law applies?
If there is no choice of law clause, there may be a battle of which law applies in interpreting the contract. While most jurisdictions will apply the same basic principles, there are nuances or even disagreement on some points. For example, some jurisdictions will not allow a claim based on common law impossibility/impracticality if the contract has a force majeure clause even if that clause is not found to permit application of force majeure.
3. Does the event fit?
Often the force majeure clause contains a list of specific events. Counterintuitively, the more specific the items in the force majeure clause, the less it might apply to an event that does not fit in one of the specific definitions. The doctrine ejusdem generis means that if there are numerous specific items, then a general term will not necessarily apply to a non-specified item that is not “like” the others. Similarly, different jurisdictions may have resolved the issue as to whether a particular event is an “Act of God” so the choice of law may also be significant. Bear in mind as well that frustration of purpose may remain a defense, where even if performance is possible, the point of it no longer exists.
4. Is the event foreseeable?
If there is a contract and it has a force majeure clause, then unless the clause reinserts a condition of foreseeability, foreseeability is not an element of the proof. It will be a function of the contract language as risk allocation. If there is no force majeure clause, then foreseeability will matter, and the course of dealings between the parties and the particular nature of the relationship and business also become relevant.
A force majeure clause is a contractual risk allocation, comparable in some ways to indemnification provisions. A force majeure “situation” may be labeled differently (such as “Impossibility of performance”) or it may be dealt with as a contract condition. For example, a contract may have an “if, then” provision detailing certain events. If so, courts seek to hold parties to the contract they wrote and will generally enforce the condition. On the other hand, trying to fit an otherwise unspecified event into the definitions of the force majeure clause may be more difficult, particularly where the clause appears to be pure “boilerplate” and the court cannot discern the intent of the parties.
6. Government acts
Government regulation, by way of statutory enactment, “jawboning” and change of law can constitute am event of force majeure or impossibility/impracticability of performance, or under common law concepts of impracticability or impossibility of performance. The “shelter in place” orders, for example, could be the intervening act that affects impracticability. On the other hand, certain government acts that may be anticipated in affecting the market may be found to be an assumption of the risk by the parties unless expressly dealt with. In some industries, such as oil and gas, executive orders may be common as part of regulatory authority and may be expressly mentioned in a force majeure clause. A force majeure clause, though, will be read in connection with other provisions of the contract, and only supersede those clauses in which it conflicts. Another example is where a commercial lease states that a tenant remains obligated to pay rent is not affected or excused because of a governmental rule, order or regulation. The bottom line is that force majeure remains a limited exception, and where a matter of a contract, the language will govern, and where governmental acts are not specified, the issue will be analyzed in terms of whether it fits the broad description or otherwise, if the jurisdiction permits the analysis, whether it is an appropriate intervening act that is beyond the control of the party and renders performance impossible under the circumstances. Article 2-615 of the Uniform Commercial Code specifically excuses non-performance where the “basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.”
All of the language in the force majeure clause is relevant, establishing discrete elements to be proven. Also, the act complained of must have a direct causal effect on the reason for non-performance. For example, a clause that includes “terrorist acts” will not necessarily include subjective fears, unless, for example, “heightened fear of terrorism” is listed as an excuse, as one case noted. Issues of the party’s negligence or lack of care will also impact its ability to assert the application of a force majeure clause or common law impossibility/impracticality.
8. Economic downturn/loss of profit
Generally speaking, it is not a force majeure event when a contract simply becomes unprofitable. It does not cover the “vicissitudes of the marketplace,” as one court expressed. If the contract has a condition or benchmark criteria that link performance to such events or standards, that is one thing, but unless so specified in a force majeure clause as risk allocation, economic loss will not be a legitimate event of force majeure. A dramatic shift in a currency exchange rate, for example, rendering the contract unprofitable for one of the parties, has been held to not constitute impossibility or impracticality of performance.
9. Request for assurance/anticipatory breach/good faith and fair dealing
Under the Uniform Commercial Code, if a party has reasonable grounds for the insecurity of the performance of the other party, it may demand adequate assurance. If such is not provided, or objectively not satisfactory, then the other party may declare anticipatory breach. More to the point is that a premature or legally deficient force majeure notification may not suffice not only to qualify as adequate assurance but arguably may be seen as an anticipatory breach, if not an actual repudiation of the contract. Parties sending force majeure notices should be specific as to the reasons underlying and justifying the notice, thinking through the checklist factors outlined above. Responding parties should avoid knee-jerk denials, and instead consider a response that either simply acknowledges receipt and advises that the matter will be reviewed, or otherwise respond with specific reasons for rejecting the assertion. The reasons set forth become part of the record of how the parties address the issue and will become relevant to ultimate resolution. Not all jurisdictions recognize an independent cause of action for breach of the implied covenant of good faith and fair dealing, although it may be a defense, and improper use of a force majeure clause, in connection with other acts, may subject the misuse to liability. In cases involving predominantly sale of goods, “good faith” permeates obligations under the Uniform Commercial Code’s Article 2-615 force majeure provision.
10. Best Practices Going Forward
The above discussion has addressed dealing with current contracts in place. Whether sending force majeure notices or responding to them, do not rely on a pro forma, boilerplate recitation. Separate and apart from dealing with the current contracts, consider reviewing and revising (or eliminating) force majeure clauses in contracts for future transactions.
As part of this review or future drafting of force majeure clauses, consider the above checklist items but also give thought to whether the clause is needed. This is where choice of law becomes relevant, as well as whether the provisions of the Uniform Commercial Code (in a predominantly sale of goods situation) suffices. Are there other relevant statutes that cover the issue in a particular area of practice? Consider the use of conditions versus generic force majeure language to address specific exigencies, such as in the currency fluctuation example. To the extent that economic performance is to be anticipated, address those issues by use of conditions, and do not try to work them into a force majeure situation. It makes no sense to attempt to state in the contract the same principles already afforded at common law, and risk losing those benefits in jurisdictions that disallow reliance on common law where there is a force majeure clause. Be wary of listing too many items after the “including but not limited to” language, lest you dilute the broad language in other parts of the clause.
The current crisis has forced lawyers to consider in more profound ways the use and misuse of force majeure clauses and move beyond boilerplate.