Over the past few weeks, we have had many clients reach out to discuss their options with respect to contracts they (or their customers) want to amend as a result of the COVID-19 crisis.
Among the many unanticipated consequences of the coronavirus pandemic are the questions we are fielding about whether otherwise valid contracts can be breached as a result of the coronavirus. Our conversations with clients include the business and legal case for the best path forward. This blog, however, is limited to the legal principles of force majeure.
While nobody could have predicted this particular pandemic, parties have often included contractual clauses called “force majeure” clauses to protect themselves from liability if certain circumstances make it difficult or impossible to perform a contract.
What is “force majeure”?
These “force majeure” clauses typically include what are called “acts of God,” or unforeseeable weather events, natural disasters, hurricanes, and the like.
As New York’s Court of Appeals, the highest court in the state, described it – “a force majeure event is an event beyond the control of the parties that prevents performance under a contract and may excuse nonperformance.” Beardslee v. Inflection Energy, LLC, 25 N.Y.3d 150, 154 (2015).
And in interpreting agreements, New York courts have not been forgiving when determining whether a party was actually “prevented” from performing versus performance being very difficult.
Some level of clairvoyance is needed
Contracts are complicated – and if you are relying on a “force majeure” clause, you can’t simply write that in the contract and expect to be relieved of your contractual duties.
To be an enforceable clause, the Supreme Court has held that the event must be “unforeseeable” – but in New York, the clause “must also include the specific event that is claimed to have prevented performance.” Phibro Energy, Inc. v. Empresa de Polimeros de Sines Sarl, 720 F. Supp. 312, 318 (S.D.N.Y. 1989); United States v. Brooks-Callaway Co., 318 U.S. 120, 122-23.
Basically – the event itself has to be unforeseeable, but you need the foresight to include that specific event in the clause. Yes, you read that correctly.
So, why do courts require specificity? Because they don’t want contractually bound parties to be released from their duties unless the parties (1) truly cannot perform, and (2) agreed to the terms in which performance would be excused. The courts want parties to be perform, and not be able to escape their responsibilities just because performing would create some unanticipated difficulties. Phibro Energy, Inc., 720 F. Supp. at 318.
When “force majeure” claims arise, parties often dispute contractual specificity – whether the clause actually includes the event that occurred – and foreseeability. These questions aren’t met with simple answers.
Interpreting contractual language can be a question for the court – but it can also be an issue that gets handed to a jury, particularly if the language is “susceptible of at least two fairly reasonable interpretations.” Id. at 321.
If the party who tried to “get out” of the contract by invoking the “force majeure” clause comes out on the losing end, that party has effectively breached the contract and will be liable for damages stemming from that breach. So, while it might seem like a catch-all clause, the “force majeure” provisions often come with complex issues that require litigation.
How it ties into COVID-19
In New York, the pandemic has caused all but “essential businesses” to close. Depending on what the contract entails, some will find it impossible – not merely impracticable or difficult – to perform their contractual duties without going out of business. Whether performance will be excused in those cases will be based, in part, on whether the contract has a force majeure clause, and whether that clause was specific enough to reference pandemics.
“New York Law requires courts to interpret force majeure clauses to excuse performance only for events actually named in the clause and of which the parties could not have been aware of when they entered the agreement.” Mitsubishi Int’l Corp. v. Interstate Chem. Corp., 2008 U.S. Dist. Lexis 74394, 5, n.3 (S.D.N.Y., 2008) (emphasis added).
What does that mean for COVID-19? For a “force majeure” clause to be valid, the contract – and that provision – must include some language relating to the pandemic. How specific does it have to be, exactly? That may be for a court to decide.
A recent study showed that not many contracts include this specific language. Only 14 percent of contracts in the study had language relating to pandemics – public-health related language that included “flu, epidemic, serious illness or plagues, disease, emergency or outbreak.”
Instead, many contracts include “catch all” language – like “for any reason” – in their respective “force majeure” clauses, and courts have been reluctant to enforce such clauses – because, again, it does not specifically mention the event which caused the issues for the parties. Team Mktg.USA Corp. v. Power Pact LLC, 839 N.Y.S. 2d 242, 246 (3d Dep’t 2007).
The hope is that many of the parties who were unexpectedly burdened by the pandemic will work together under the circumstances to maintain their relationship. Having a sense of understanding, particularly because people are under financial stress, is important – but the reality is, some may inevitably find themselves in a situation where litigation is necessary.
That’s why professional legal guidance is paramount. If you have any questions about a “force majeure” clause, the enforceability of a contract, or any other concern about your contracts, The Wagoner Firm PLLC can help. Contact: 518-400-0955.