With the COVID-19 eliciting travel bans, national event postponements, and widespread social distancing, understanding how unforeseen circumstances can affect contract enforcement is critical for businesses during extreme situations, including the COVID-19 pandemic. Luckily, most contracts contain “Force Majeure” clauses, which are useful to businesses as they formulate future business operations to navigate through the physical and economic consequences of the COVID-19 pandemic. Generally speaking, “Force Majeure” clauses (defined as an “unforeseeable circumstances that prevent someone from fulfilling a contract”) exist in most commercial agreements, including lease agreements. A Force Majeure clause generally excuses a party to a contract from performing under the contract due to suffering an “unforeseeable circumstance” that is outside of that party’s control. The unforeseeable event or circumstance, which is outside of the non-performing party’s control, is a defense to a breach of contract claim advanced by the breaching party. While there is no universally accepted definition for events which constitute “Force Majeure”, Courts have excused performance in various scenarios such as gasoline shortage, work stoppages, as well as inclement and extreme weather events. However, Courts have also ruled that a “mere increase in expense does not excuse performance unless there exists extreme and unreasonable difficulty, expense, injury or loss involved.” San Mateo Cmty College Dist. V. Half Moon Bay P’ship, 65 Cal. App. 4th 401 (1998). Additionally, the burden of proving impossibility of performance or excuse is on the party asserting the defense. Id.
In particular, California Uniform Commercial Code Section 2615 addresses the defense of impracticability in commercial settings for supply agreements. The test of commercial impracticability generally does not allow increased cost alone to excuse performance “unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance.” Id. at Commentary Note 4. The notes of Section 2615 go on to state that “but a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section.” (citing Ford & Sons, Ltd. V. Henry Leetham & Sons, Ltd 21 Com Cas 55 (1915, KBD).
Adding more clarity to the meaning of “Force Majeure,” the 9th Circuit has held that “Force majeure is not necessarily limited to the equivalent of an act of God, but the test is whether under the particular circumstances there was such an insuperable interference occurring without the parties’ intervention as could not have been prevented by prudence, diligence and care.” Horsemen’s Benevolent & Protective Ass’n v. Valley Racing Ass’n, 4 Cal. App. 4th 1538, (1992)
In analyzing Force Majeure clauses, the plain language of the clause should be carefully examined to ensure applicability and scope. Also, if the contract at issue was entered into while the so-called ‘unforeseeable event’ was ongoing, the defense may not be applicable altogether. In order to implement a Force Majeure event defense, proper notice must be promptly provided to the other party. Hence, the notice, timing, and scope of the clause are all critical considerations when adopting a Force Majeure event.
Reflecting on precedent during the first SARS epidemic can be illustrative of how Courts may treat a COVID-19 triggered Force Majeure defense. For instance, in 2003, the American Association for Cancer Research (“AACR”) was scheduled to hold its annual meeting in Toronto, Canada, when the government declared a “provincial” emergency due to the SARS epidemic. The AACR had contracts with over 20 hotels and anticipated over 16,000 attendees. However, just a few days before the conference was set to begin, and in light of the dangers posed by the SARS epidemic, the AACR decided to cancel the convention. Thereafter, the Toronto Convention and Visitors Association brought suit seeking over $6,000,000 in damages. The AACR utilized the defense of commercial impracticability predicated upon the SARS epidemic. While ultimately the litigation was resolved via mediation, the lessons learned from the AACR event are invaluable precedent to businesses who book convention space for large events or conventions: businesses should demand inclusion of Force Majeure clauses in hospitality agreements for events because suffering a loss of income alone, is usually not enough. Moreover, it is important to note that the declaration of a government “emergency” did not prevent the AACR from being sued.
Turning to the recent and ongoing COVID-19 events, the question of whether the Coronavirus’ physical and economic consequences, such as travel bans, and the declaration of a national emergency constitutes an “insuperable interference,” remains looming overhead. While most Force Majeure clauses do not reference “disease” or “pandemic” as a specific ground to suspend performance of a contractual obligation – supply constraints, travel disruptions, and a government mandate limiting crowds in public places may create unanticipated and undue burdens upon lessees, contractors, hospitality operators and manufacturers alike. The COVID-19 pandemic has also resulted in many businesses operating with skeleton staff remotely, or suspending operations altogether. A government mandate alone, in and of itself, may trigger the applicability of a Force Majeure defense. These issues must be thoroughly analyzed in the context of the Force Majeure clause’s plain language, and in the context of the contract as a whole. To that end, here are the several high-level recommendations to business owners during the COVID-19 pandemic:
- Review your contracts thoroughly for “Force Majeure” clauses and demand that such clauses be included in your contracts via amendments, if necessary;
- If your contract contains a “Force Majeure” clause, and you are facing severe business losses, contemplate giving notice to the other party and suspending your performance obligations;
- Prepare for litigation exposure by documenting the impact of the unforeseen circumstance upon your operations and ability to perform in order to present a viable defense;
- Be prepared to operate after the pandemic ends – the Force Majeure defense may only suspend your obligations under the contract, but not relieve such obligations altogether;
- If you are in the midst of suspending operations, immediately review your respective insurance policies for terms regarding business interruptions.