“People plan, and Fate laughs.”
As the COVID-19 pandemic and its associated lockdowns and shutdowns continue, businesses should review their key contracts for a routine clause that suddenly looms large—the force majeure clause. As some lawyers say, it never hurts to actually read the contract.
What does a Force Majeure Clause Do?
A force majeure clause excuses performance made impossible by events that “human vigilance and industry can neither foresee nor prevent.” London Guarantee & Accident Co. v. Indus. Accident Comm’n of Cal., 202 Cal. 239, 242 (1927). A standard force majeure clause may provide: “Neither party will be liable to the other party by reason of any failure in performance of this agreement if the failure arises out of acts of God, acts of the other party, acts of governmental authority, fires, strikes, delays in transportation, riots or war, or any cause beyond the reasonable control of that party.” Of course, specific clauses differ.
What Makes an Event Force Majeure?
Not all events are force majeure. California courts consider “whether under the particular circumstances there was such an insuperable interference occurring without the party’s intervention as could not have been prevented by the exercise of prudence, diligence and care.” Pac. Vegetable Oil Corp. v. C. S. T., Ltd., 29 Cal.2d 228, 238 (1946). That said, the COVID-19 Pandemic of 2020 and subsequent lockdowns are each undeniably so. In fact, a court in New York offered a glimpse of what is likely to come when it noted in a footnote that the legislature had taken action “to redress the decimation of our economy by force majeure of Coronavirus Pandemic of 2020.” One Wythe LLC v. Elevations Urban Landscape Design Inc., Index No. LT-77696-19/KI, 2020 WL 1917760, at *6, fn. 17 (N.Y. Civ. Ct., Apr. 17, 2020).
That does not end the analysis, however.
Foreseeability. In California, “unless a contract explicitly identifies an event as a force majeure, the event must be unforeseeable at the time of contracting to qualify as such.” Free Range Content, Inc. v. Google Inc., No. 14-cv-02329-BLF, 2016 WL 2902332, at *6 (N.D. Cal. May 13, 2016); Watson Labs., Inc. v. Rhone-Poulenc Rorer, Inc., 178 F.Supp.2d 1099, 1111 (C.D. Cal. 2001).
Courts in other states have refused to insert the unforeseeability requirement into force majeure clauses. See, e.g., Perlman v. Pioneer Ltd. P’ship, 918 F.2d 1244, 1248-1249 (5th Cir. 1990) (inability to obtain governmental permits, though foreseeable, was a force majeure event); Sabine Corp. v. ONG W., Inc., 725 F.Supp. 1157, 1170-1172 (W.D.Okla. 1989) (rejecting argument that a force majeure event must be unforeseeable, but finding decrease in gas profit was not a force majeure event).
Some may argue that COVID-19 is foreseeable, as epidemic diseases such as SARS and H1N1 emerge every few years. But like hurricanes, an epidemic becomes a force majeure event when it “causes unexpected and unforeseeable devastation.” Rayfield v. Millet Motel, 185 So.3d 183, 186 (5th Cir. 2016). Furthermore, acts of government authority, such as the lockdown orders issued by governments in light of COVID-19, are often explicitly identified as a force majeure event in contracts.
Impossibility. A force majeure event does not excuse performance unless it makes performance impossible. Hong Kong Islands Line Am. S.A. v. Distribution Servs. Ltd., 795 F.Supp.983, 989 (C.D. Cal. 1991). “Mere increase in expense does not excuse the performance unless there exists ‘extreme and unreasonable difficulty, expense, injury, or loss involved.’” Butler v. Nepple, 54 Cal.2d 589, 599 (1960). Many force majeure clauses also require that the nonperforming party to mitigate the damage. Businesses that are forced to shut down entirely should easily overcome this hurdle. For those that are still operating at some capacity, it will be critical to show evidence demonstrating that performance of the contract has become unreasonably difficult.
Other Limitations. Force majeure clauses often contain a notice requirement. Failure to give timely notice under the contract may vitiate the defense. See U.S. v. Pflueger, Civ. No. 06-00140 BMK, 2007 WL 1876028, at *2 (D. Haw. Jun. 27, 2007). In the context of an oil and gas lease, a condition precedent in the habendum clause—a clause of special limitation in a deed or lease setting forth the duration of the grantee’s or lessee’s interest in the premises—is not excused when the force majeure clause is not incorporated into the habendum clause. San Mateo Cmty. Coll. Dist. v. Half Moon Bay Ltd. P’ship, 65 Cal.App.4th 401, 412 (1998). The San Mateo court cautioned that “[c]areless drafting . . . might nullify the effectiveness of [a force majeure] clause as a device for preventing the expiration of the lease for failure to comply with the conditions or limitation of the typical habendum clause.” Id. at p. 411. A careful reading of what the force majeure clause was intended to cover is thus essential.
Force Majeure by Statute.
California Civil Code section 1511 may excuse performance “[w]hen it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States.” California Civil Code section 1441 voids a condition precedent when its fulfillment is impossible. This is consistent with the holding in San Mateo above, where the court went on to find that, even assuming the force majeure clause applied, the nonperforming party failed to prove that its performance was made impossible. San Mateo, 65 Cal.App.4th, at pp. 414-415. The impossibility includes impracticability, which “applies when performance would require excessive and unreasonable expense.” Habitat Trust for Wildlife, Inc. v. City of Rancho Cucamonga, 175 Cal.App.4th 1306, 1336 (2009).
Now is the Time to Review Force Majeure Clauses.
These are extraordinary times, times for which the force majeure clause was put in place. Prudent application of the clause can serve all parties to a contract. Slater Law Group is here to answer your questions about how the current crisis may affect your obligations, and the obligations of your counterparties.