Is the Coronavirus a Force Majeure that Excuses Performance of a U.S. Law Contract?

David Marmins, my incredibly talented partner, has written a great legal update on whether the coronavirus is a force majeure event in U.S. contract law. This is essential reading for any Irish or Northern Irish company with contracts governed by U.S. law.

This is the update:

The coronavirus is causing a true Friday the 13th nightmare scenario for many companies today. In mid-March, the country began ardently practicing social distancing and self-quarantining to a degree never seen before, and many businesses are immediately facing an uncertain future.

One coronavirus-related question real estate litigators are getting often today is whether force majeure (“superior force”) or “Act of God” clauses justify the suspension of performance of their duties under contracts. The answer depends on the specific contract language, local law, and the causal connection between the pandemic and the parties’ ability to perform their contractual obligations.

What Is a Force Majeure Clause?

Black’s Law Dictionary explains that a force majeure clause “is meant to protect the parties in the event that a contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care.” Force majeure clauses allocate risk between the parties when an unanticipated event makes performance impossible or impracticable.

While state laws vary, every jurisdiction respects parties’ right to contract. So, disputes over application of force majeure clauses start with the specific language used in the contract. A force majeure lease clause may contain a list of specific events that constitute a force majeure; it may be vaguer to include anything out of the parties’ control; or the clause may define specific events and then include broad “catch-all” language such as “for other reason whether of a like nature or not that is beyond the control of the party affected.” The following comprises an example of such a clause:

If either party is delayed or hindered in or prevented from performing any term, covenant or act required hereunder by reasons of strikes, labor troubles, inability to procure materials or services, power failure, restrictive governmental laws or regulations, riots, insurrection, sabotage, terrorism, act of the public enemy, rebellion, war, act of God, or other reason whether of a like nature or not that is beyond the control of the party affected, financial inability excepted, then the performance of that term, covenant or act is excused for the period of the delay and the party delayed shall be entitled to perform such term, covenant or act within the appropriate time period after the expiration of the period of such delay.  Nothing in this Section, however, shall excuse Tenant from the prompt payment of any Rent or the obligation to open for business on the Commencement Date.

Generally speaking, the more specific the clause, the more limited application it has – if the actual occurrence is not on a long list of specific events, it is not likely a force majeure. Most clauses specify that they are only invoked when performance becomes impossible; some have more liberal language requiring only the hindrance or delay of performance.

The Coronavirus Outbreak and Force Majeure Clauses

As it pertains to the coronavirus, any broad force majeure clause language should apply since March 11, when the World Health Organization declared it a pandemic. It is unlikely any court would decide that any private party has caused the coronavirus (though, a few years ago, an Idaho Court did determine that there were questions of fact whether an egg-producer for a grocery chain contributed to an outbreak of avian flu; which outbreak allegedly prevented it from fulfilling its contractually obligated output of eggs, see Rembrandt Enterprises, Inc. v. Dahmes Stainless, Inc.2017 WL 3929308 (N.D. IO 2017)). And, many force majeure clauses specifically include “epidemic” or “pandemic” in its laundry list of qualifying events. See Aukema v. Chesapeake Appalachia, LLC904 F.Supp.2d 199, 206 (N.D. NY 2012) (“term ‘force majeure” as used herein shall be Acts of God, strikes, lockouts, or other industrial disturbances, acts of the public enemy, wars, blockades, riots, epidemics, lightning, earthquakes, explosions, accidents or repairs to machinery or pipes, delays of carriers, inability to obtain materials or rights of way on reasonable terms, acts of public authorities, or any other causes, whether or not of the same kind as enumerated herein, not within the control of the lessee and which by the exercise of due diligence lessee is unable to overcome”) (emphasis added). Even without that specific reference, the coronavirus should qualify under most force majeure clauses due to the government-imposed travel bans and quarantines.

Most courts require the party claiming force majeure to show that the event was not foreseeable and directly caused the failure to meet its contractual obligations. While this is often a close call in weather-related natural disasters—the geographic scope and actual impact on the stream of commerce of a storm is often debatable—a pandemic resulting in mass closures of all public events and schools should not be a close call. This is not a normal risk of doing business. The law does require the mitigation of damages, and many businesses can continue to operate at some, if not full, capacity.

As in any contract matter, strict compliance with the technical requirements of the contract may be necessary for a party to invoke a force majeure clause. Typically, a contract requires prompt notice of a claim of force majeure. Several courts have refused parties’ force majeure claims when they failed to provide adequate notice under the contract. Seee.g.Three RP Limited Partnership v. Dick’s Sporting Goods, Inc., 2019 U.S. Dist. LEXIS 22534, at *14 (E.D. OK 2019), quoting Sabine Corp. v. ONG Western, Inc., 725 F. Supp. 1157, 1168 (W.D.Okla.1989) (“‘failure to give proper notice is fatal to a defense based upon a force majeure clause requiring notice’”).

Questions regarding force majeure clauses are one of many issues that arise during challenging times for commerce, but with vigilant adherence to their contracts and applicable law, parties can navigate these troubled waters successfully.