The cannabis industry is in flux. Part of that is healthy maturation and part is a result of the COVID-19 (coronavirus) global pandemic that has impacted everyone.
Over the last year, falling valuations and volatile prices caused a wave of disputes between cannabis companies seeking to back out of deals or modify contracts. These disputes may multiply in light of coronavirus-related disruptions that have made contractual performance impracticable or impossible. For companies seeking to avoid their contractual obligations, little-known and largely misunderstood force majeure provisions may provide a potent weapon.
Generally, a force majeure provision excuses a party from performing under a contract when performance would be impossible or impracticable due to circumstances beyond the party’s control. Whether the coronavirus itself or the government’s efforts to mitigate it – including stay-in-place orders and business closures – qualify as force majeure events will be the focus of negotiations now and litigation for years to come. Indeed, such litigation has already begun. On March 23, a Kentucky CBD company, Third Wave Farms, filed suit against a hemp processor, Pure Valley Solutions, seeking a declaratory judgment that its agreement to purchase 5,000 liters of CBD oil was terminated, in part, due to “the spread of the coronavirus and the state of emergency declared in Kentucky” under the agreement’s force majeure provision. As this suit demonstrates, whether these provisions excuse a party’s failure to perform will be paramount for many cannabis companies during the COVID-19 crisis.
Like any contractual term, the scope and effect of a force majeure provision is determined by its specific language and applicable state law. But the language used in these provisions and the laws governing their interpretation share common features from which general considerations can be gleaned. This article outlines how to (1) determine whether a force majeure provision can excuse non-performance caused by the coronavirus; (2) invoke a force majeure provision; and (3) defend against a provision’s invocation.
Determining Whether Force Majeure Applies
Companies analyzing whether the coronavirus excuses performance under a force majeure provision must answer the following questions:
- Does the coronavirus or the government’s efforts to mitigate it constitute a force majeure event under the language of the provision? The following triggering events found in many force majeure provisions may qualify: “pandemic,” “epidemic,” “disease,” “national emergency,” “Act of Government,” “Act of God,” and “circumstances beyond the parties’ control.”
- Has the force majeure event caused the non-performance? Parties that were or would have been unable to perform absent coronavirus-related disruptions cannot use force majeure to excuse non-performance unrelated to the coronavirus.
- What level of disruption to performance does the provision require? Many provisions require that the force majeure event render performance impossible. Others use lesser standards like commercial impracticability.
- Does the disruption to performance meet the applicable standard? If the coronavirus has simply made performance less convenient or profitable, it is unlikely that the force majeure provision will excuse non-performance even under more lenient standards like commercial impracticability.
Successfully Invoking Force Majeure
A company seeking to invoke a force majeure provision’s protections should take these steps:
- Document (a) the causal link between the coronavirus and your non-performance and (b) your efforts to mitigate the coronavirus’ impact on your performance. These documents can help you convince the other party that the force majeure provision applies. If that issue is litigated, these documents will be critical.
- Provide notice to the other party. Many force majeure provisions specifically require such notice and may include a deadline for providing it. Absent such a requirement, timely informing your counterparty may still be advisable so that it can attempt to mitigate the impact of your non-performance. This could help you maintain a good relationship and limit your exposure if litigation ensues.
Defending Against a Counterparty’s Invocation of Force Majeure
Companies that receive notice that a counterparty is seeking to invoke a force majeure provision should:
- Evaluate whether the coronavirus or the government’s response to it qualifies as a force majeure event.
- Evaluate whether the non-performing party complied with the provision’s specific requirements, including notice.
- Evaluate whether the coronavirus caused the party’s non-performance and its efforts to mitigate damages. Request relevant documents from the non-performing party to assist your evaluation.
- Evaluate your options. Your menu of options may include (a) demanding that the party perform pursuant to the contract’s original terms; (b) amending the contract’s terms as an accommodation; (c) terminating the contract altogether; (d) filing suit seeking a declaratory judgment regarding the parties’ contractual rights and obligations; or (e) filing suit for damages based on the party’s breach. Which option is best for you will depend on numerous factors, including (a) your evaluation of items 1-3; (b) the importance of the counterparty’s performance to your business; (c) your ability to obtain performance from another party on acceptable terms; (d) your desire to maintain a relationship with the non-performing party; and (e) the risk that the counterparty becomes judgment proof during the course of litigation.
Force majeure provisions will be the difference between sinking and swimming for many cannabis companies navigating disruptions caused by the coronavirus. An unanticipated global pandemic may well provide a sound basis for modifying contractual obligations, and sophisticated cannabis companies will closely examine force majeure provisions in their agreements. On the other hand, in an industry where many unsophisticated companies were struggling to meet contractual obligations, we expect a spike in force majeure claims as those companies look for a way out.