Does the Novel Coronavirus (COVID-19) Allow Reliance On Your Contract’s Force Majeure Provision? The Language Matters

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The impact of the novel Coronavirus (COVID-19) is being felt throughout every sector of our society. Mandated government quarantines and temporary business closures, work-from-home requirements, shelter-in-place orders, travel bans, and the prohibition of large groups of people, are just some of the measures federal, state, and local governments have taken to combat its spread. These restrictions are having a profound impact on the business community at large and are making performing contractual obligations exceedingly difficult.

Commercial contracts routinely include force majeure provisions, which if applicable, may excuse a party’s delay or nonperformance under a contract when extraordinary events, beyond the control of the nonperforming party, prevent a party from fulfilling its contractual obligations. These force majeure provisions will be interpreted under the law of the controlling jurisdiction. Force majeure clauses are language specific, and courts will typically look first to the “four-corners” of the contract when interpreting the applicability of the force majeure provision.[1] Courts typically construe these provisons narrowly. As a general rule, courts will apply the express language of these provisions according to their terms. Courts will not generally expand the conditions or elements constituting force majeure events and will adhere to those specifically enumerated.

Most well-drafted force majeure clauses enumerate the situations or events – e.g., flood, earthquake, fire, act of God, or intervening law -- that excuse performance. In Kel Kim Corp. v. Cent. Mkts., Inc., 70 N.Y.2d 900, 902 (1987), New York State’s highest court held that a force majeure defense is narrow and excuses nonperformance only if “the force majeure clause specifically includes the event that actually prevents a party’s performance.” Under the traditional rule of contract interpretation known by the Latin phrase expressio unius est exclusio alterius -- meaning that the explicit mention of one thing results in the exclusion of other things not mentioned[2] -- a well-crafted force majeure provision should also include a catch-all provision to include any and all superseding causes beyond the reasonable control of the parties, whether similar or dissimilar to any of the enumerated events. The purpose of such a catch-all provision is to protect parties from unwittingly surrendering protections available to parties under the common law doctrines of impossibility, frustration of purpose, or the uniform commercial code §2-615. Looking only at the force majeure clause (if the contract contains one) does not necessarily conclude the issue.

Aside from describing the events that may excuse a party’s inability to perform its contractual obligations, force majeure clauses typically include requirements to mitigate damages, proof that the contract is actually impossible to perform, and the requirement to notify the non-breaching party of the force majeure event and the nonperforming party’s inability to perform as a result.[3] Under New York law, a nonperforming party seeking to avoid its obligations must not only show the occurrence of a force majeure event, but must also show that such party was unable to fulfill its contractual obligation despite reasonable efforts to do so. Absent some other hurdle or barrier, increased costs or other financial difficulties in performing are generally not sufficient force majeure events for performance avoidance.

To determine if COVID-19 and the subsequent government shutdown of industry give rise to a force majeure event requires a fact specific inquiry, one that will largely depend on the language of the agreement as evidencing the intent of the parties. So if the force majeure clause you are reviewing does not specifically list the existence of a pandemic, but does list government actions taken in response to the pandemic, perhaps a government action that is preventing performance can be used as a basis to delay or excuse performance. Or, if the clause language permits a party to assert that performance is impossible, impractical, or not advisable, then a discretionary right to delay or terminate will be allowed.

Most courts will attempt to respect the rights of the contracting parties to negotiate, draft, and implement their agreements and will assume that the language used in their agreements was deliberately chosen and intended by the parties. Courts will further assume that each word in the agreement has the meaning that can be derived from the “four-corners” of the document. Force majeure provisions should be interpreted according to the plain meaning of the language in the contract and, when enforcing a force majeure provision, the pary invoking that provision must be careful to adhere to the notice, mitigation, or other contractual requirements imposed.


 

[1] Richard A. Lord, 30 Williston on Contracts §77:31 (4th Ed.) (“What types of events constitute force majeure depend on the specific language included in the clause itself.”).

[2] https://www.merriam-webster.com/legal/expressio%20unius%20est%20exclusio%20alterius

[3] Milford Power Co., LLC v. Alstom Power, Inc., 263 Conn. 616, 618-19 (2003).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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