With considerable adverse impact to the global economy thus far, the pandemic of SARS-CoV-2, which causes the novel coronavirus disease called COVID-19 (COVID-19) is sending businesses world-wide, big and small, and their advisors, scrambling to understand the impact of COVID-19 on their contractual arrangements, whether as a provider or recipient of goods or services, with the hope to avoid or at least minimize potentially severe consequences of the outbreak. This article examines force majeure and other potential excuses from contractual performance under New York law.
Excusing Contractual Performance When a Force Majeure Clause is in Play
Contract parties typically negotiate a force majeure provision in their agreements in order to allocate the risk of the occurrence of an event beyond the control of a party that causes such party to delay performance of its obligations, or altogether prevents it from such performance. As a creature of contract, under New York law, what is deemed to be a force majeure event and its application to a party’s contractual rights and obligations, will depend on the specific language of the force majeure clause negotiated by the parties. It is common to see force majeure provisions drafted in a variety of manners from those narrowly tailored to a specific list of enumerated events to broadly worded provisions attempting to capture any event outside the control of the non-performing party.
The New York courts have generally interpreted force majeure clauses narrowly. In New York, the courts have consistently found that a party will only be excused from performance under a force majeure clause if such clause expressly includes the event in question and such event actually prevents the party’s performance of its obligations under the contract.1
Accordingly, in the case of COVID-19, parties seeking to be relieved from performance under contracts should be on the lookout for words like “epidemic”, “pandemic”, “disease outbreak”, “changes in applicable law”, “government orders or mandates”, “work stoppages” or “national or regional emergency” in the force majeure clause included in their contracts. Express reference to such an event in the applicable clause may allow a party seriously affected by COVID-19 or by government action taken in response to this crisis to invoke a force majeure defense to an obligation to perform assuming that the invoking party can also prove that such event has actually prevented its performance. However, it is important to note that “the burden of demonstrating force majeure is on the party seeking to have its performance excused, ... and the non-performing party must demonstrate its efforts to perform its contractual duties despite the occurrence of the event that it claims constituted force majeure.”2 “Mere impracticality or unanticipated difficulty is not enough to excuse performance.”3
In line with the general principle of narrow interpretation of force majeure provisions, under New York case law, parties seeking to be excused from performance should keep in mind that a force majeure provision with broadly drafted “catch-all” language will not necessarily save the day if such provision does not otherwise specifically cover the event causing non-performance. In fact, New York courts have found that the principle of interpretation applicable to catch-all clauses (such as “or other similar causes beyond the control of such party”) is that a catch-all clause is not to be given expansive meaning and the occurrence of the non-listed event must be of the same kind or nature as the particular matters specifically listed.4 In addition, when the event being alleged to cause non-performance is not specifically listed, certain New York courts have indicated that the party seeking to invoke the force majeure clause in reliance on a catch-all provision will also have to prove that the event was unforeseeable. For example, a New York court rejected a non-performing party’s attempt to rely on a catch-all provision when such party argued that an increase in the price of manufacturing supplies was a force majeure event, reasoning that such increase could have been reasonably anticipated.5 Similarly, a breakdown in negotiations was not found to be an unforeseeable event.6 Needless to say, parties to contracts that will be negotiated and signed in the midst of the COVID-19 outbreak should take care to address COVID-19 and related issues specifically in their force majeure provisions as it would be highly improbable to be able to prove that the potential future impact of the outbreak is not foreseeable at this point.
In all cases, it is important to note that the application of force majeure clauses will require an extensive fact based analysis reviewing, among other things, the clause itself, the event alleged to cause non-performance, whether performance has truly become impossible or substantially prevented as a result of the event (as opposed to, for example, just more expensive) and the purpose of the contract at issue.
Acts of God under Force Majeure Clauses
While events such as “pandemics”, “epidemics” and “disease outbreaks” are typically not specified in general commercial contract force majeure clauses, “acts of God” is a commonly included event. As of now, New York courts do not appear to have addressed the issue of whether a disease outbreak or a pandemic would be considered an "act of God" under New York law. New York courts have consistently found that an act of God denotes “those losses and injuries occasioned exclusively by natural causes, such as could not be prevented by human care, skill and foresight. If there be any co-operation of man, or any admixture of human means, the injury is not, in a legal sense, the act of God."7 New York courts’ findings with respect to acts of God generally address issues caused by hurricanes, floods and similar natural disasters. New York case law outlines that an act of God must not be human caused but instead caused by forces of nature, and it must not have been reasonably avoidable by any amount of prudence, diligence or foresight. Human intervention (or a negligent or intentional lack thereof) also cannot have been part of the cause for the disruption.8 It remains to be seen whether the courts in New York will consider an epidemic or a disease outbreak (such as COVID-19) as an “act of God”, but given the unprecedented impact of the COVID-19 outbreak, we will likely see a growing number of claims before the New York courts seeking to resolve this issue.
Excusing Contractual Performance in the Absence of a Force Majeure Clause
To the extent a contract does not contain a force majeure clause, common law defenses of impossibility of performance and frustration of purpose may be applicable. The application of these defenses principally rely on whether the event causing non-performance was foreseeable.
Under New York law, “impossibility excuses a party's performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible” and the impossibility was “produced by an unanticipated event that could not have been foreseen or guarded against in the contract.”9 However, impossibility of performance that is solely caused by financial hardship or economic trouble, even to the extent of bankruptcy, would not be excused.10
Frustration of purpose does not require that the performance of a contract becomes impossible but that the contract no longer provides the benefits the parties bargained for, again, because of intervening unforeseeable events, and the frustrated purpose was the primary reason for entering into such contract. “Frustration of purpose excuses performance when a ‘virtually cataclysmic, wholly unforeseeable event renders the contract valueless to one party’ ”.11 New York courts have indicated that “it is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss.”12
New York courts generally apply defenses of impossibility and frustration of purpose very narrowly and will only excuse performance under extraordinary and unforeseen circumstances. Like the determination of the applicability of force majeure clauses, it will be a fact-intensive inquiry to determine whether COVID-19 was an unforeseeable event causing impossibility of performance or frustration of purpose. However, despite the narrow interpretation applied by New York courts generally, it is possible that these narrow standards may be loosened up by the New York courts in light of the unprecedented impact of COVID-19.
In addition, in the context of the sale of goods, Article 2 of the Uniform Commercial Code provides an additional potential defense which may be applied if performance as agreed has been made impracticable by the occurrence of an event the failure of which to occur was a basic assumption of the parties when the contract was made (so, the event needs to be unforeseeable) or by compliance in good faith by the non-performing party with any applicable governmental regulation or order whether or not it later proves to be invalid.
The COVID-19 crisis is a fluid situation generating a multitude of issues on a daily basis. Seyfarth is closely watching this situation around the clock and is uniquely prepared to protect your interests, help you mitigate risks and liabilities, and keep you informed regarding the latest implications related to the COVID-19 crisis. Visit our Resource Center for more information.