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By: Timothy Murray, Murray, Hogue & Lannis
There is a veritable pandemic raging, and I’m not referring to COVID-19. It’s a pandemic of webinars and legal articles about force majeure and COVID-19. Sadly, no lawyer is immune from it. In force majeure article after article, we are told that the COVID-19 pandemic is unprecedented, but the only thing unprecedented may be the use of the word itself.
In fact, there is nothing novel about the novel coronavirus—at least so far as contract law is concerned. Certainly, the scope of the federal and state governments’ shutdown of businesses has been unprecedented, causing massive disruptions to the supply chain, prompting innumerable commercial tenants to declare force majeure on their rental obligations, and impelling parties to back out of all manner of deals due to economic uncertainty. But contracts are disrupted by force majeure events of all kinds, and we won’t have to wait until the COVID-19 cases meander their way through the judicial process to predict what the law will look like after it is all over. There is nothing about the pandemic that is going to shake the sturdy foundations of contract law.
One of the changes we should expect is a COVID-19-inspired term in force majeure clauses—perhaps one that mentions pandemics, epidemics, or viral outbreaks or similar terms, just as terrorism became a standard term in force majeure provisions after the September 11 terrorist attacks, and earthquakes became a standard term after the 1989 Loma Prieta quake.1 Otherwise, force majeure clauses will still be interpreted and construed the way they are now, and the doctrines of impracticability, impossibility, and frustration of purpose will not change. And, yes, we’ll still have handshake deals, perhaps without the actual handshaking—though I confess that every night I pray that someone doesn’t start calling them elbow bump deals.
In the latest edition of the Corbin on Contracts Desk Edition, which I revised last year, we devote five chapters to these matters. In my practice, I find that these cases can be factually intense and that they allow the judge much discretion—there’s less certainty here than in other areas of contract law. In this short article, rather than present a generic laundry list of black letter legal principles, I will posit seven critical lessons that every lawyer should consider in tackling force majeure and COVID-19, and I will show that the judicial precedents dealing with past force majeure events provide critical lessons for this one—lessons that we ignore at our peril.
First, it is important to ensure that we share the same underlying premises. Excusing a party from its contractual obligations for a force majeure event is the exception. “Contract liability is strict liability. It is an accepted maxim that pacta sunt servanda, contracts are to be kept. The obligor is therefore liable in damages for breach of contract even if he or she is without fault and even if circumstances have made the contract more burdensome or less desirable than he or she had anticipated.”2 But when a post-contract formation supervening event occurs, sometimes performance is excused. Here are the principal legal bases for excusing performance.
The law of impossibility, dating from the mid-19th century, required literal impossibility to excuse a party’s performance (e.g., death of the promisor or destruction of the subject matter).3 Contracting parties sought to skirt the harsh doctrine by adding force majeure clauses to their agreements that expanded the reasons to be excused from performance. Under modern contract law, impossibility has morphed into impracticability in many states, and under the modern rule, literal impossibility is no longer required. Impracticability is described in many ways, but essentially it is when a party is excused of its responsibilities because (1) performance has been made excessively burdensome—impracticable, not necessarily impossible—by a supervening event; (2) the event must not have been caused by the party seeking to be excused; (3) the event must be inconsistent with a basic assumption of the parties at the time the contract was made (instead of basic assumption, some cases—especially older cases—say that there is an implied term of the contract that the supervening event will not occur); (4) the supervening event must be, in some sense, unforeseeable—but not inconceivable4—in the sense that it must have been so unlikely to occur that a reasonable party would not have guarded against it in the contract; and (5) the party seeking to be excused of its obligation to perform must not have expressly or impliedly agreed to perform despite the event and that it did not assume the risk of it.
Not all states accept the modern trend, and even in some states that do, courts sometimes still call it impossibility.5 The Uniform Commercial Code (U.C.C.) has adopted the more progressive impracticability standard.6
Frustration of Purpose
The other extra-contractual defense is frustration of purpose. This aptly named doctrine focuses on the parties’ purpose in making their contract and has nothing to do with a party’s inability to perform. It applies where a supervening event fundamentally changes the nature of a contract and makes one party’s performance worthless to the other. The best explanation for it is an example. In the landmark case of Krell v. Henry,7 Henry rented a room from Krell for the purpose of viewing the coronation of King Edward VII. But the King fell ill, and the coronation was postponed. The very purpose of the contract—a room with a view of the coronation—was frustrated, and performance was excused.
In the wake of COVID-19, innumerable events around the world were postponed or cancelled. Every cancellation might affect other contracts. A simple frustration of purpose example: suppose a vendor rented a booth to sell T-shirts next to a large venue where a major sporting event was supposed to occur, but the sporting event is canceled due to COVID-19. The very purpose of the vendor’s contract was to capitalize on the major event, and the contract makes no sense without it. The question is, was the occurrence of the major event a basic assumption of the parties to the vendor’s rental contract?
Force Majeure Clauses in Contracts
Parties generally can allocate the risks in their contract in whatever manner they choose. The contract—not extra-contractual legal bases such as impracticability—is the starting point for discovering whether a post-formation supervening event excuses performance. “If . . . the parties include a force majeure clause in the contract, the clause supersedes the [impossibility] doctrine . . . [L]ike most contract doctrines, the doctrine of impossibility is an ‘off-the-rack’ provision that governs only if the parties have not drafted a specific assignment of the risk otherwise assigned by the provision.”8 Most courts seem to agree that “[w]hen parties specify certain force majeure events, there is no need to show that the occurrence of such an event was unforeseeable.”9 When the event is not specifically listed but a party seeks to rely on the catch-all provision of a force majeure provision, (e.g., “any other cause not enumerated herein but which is beyond the reasonable control of the party whose performance is affected”), it has been held that the event that purportedly falls within the catch-all must be unforeseeable.10
Here are seven lessons that we should consider in dealing with questions about force majeure and COVID-19.
LESSON I: The express provisions of the contract—not extra-contractual defenses—generally will determine whether a party can be excused of its contractual obligations. If the parties expressly allocated the risks in their contract, that allocation generally will govern the parties’ rights as to that risk. If a contract spells out government action as a force majeure event, the party seeking to be excused probably will have a good argument that delays in its performance directly caused by a governmentmandated closure are excused. Here are two important examples of likely scenarios we will see in the aftermath of COVID-19:
A simple and vivid illustration: Sunshine, which was in the business of procuring automobiles for resale, paid Luxury over $100,000 for the latter to obtain a Mercedes for it, but Luxury failed to obtain the Mercedes and never returned Sunshine’s money. Luxury claimed that it had given Sunshine’s funds to another party, B2K, to procure the vehicle, and that, for its part, B2K had entrusted the funds to yet another party to procure the vehicle—this last party absconded with the funds. Luxury refused to refund Sunshine’s money, claiming impossibility and frustration of commercial purpose. The court rejected these defenses, explaining: “Luxury reasonably should or could have considered the possibility that B2K would fail to obtain the vehicle, but Luxury nonetheless contracted to supply the vehicle to Sunshine without any contingencies.”12 The court refused to allocate the risk for the parties since their contract did not do it.
But wait, it can get complicated—as shown by the next paragraph:
LESSON II: The non-occurrence of the supervening circumstance must have been a basic assumption of the parties at the time of contracting. This requirement is at the core of many of these cases—it gives rise to numerous disputes, and it is easy to overlook in drafting:
LESSON III: Even severe cost increases or significant market fluctuations, in and of themselves, generally do not excuse performance. This is a major theme in this area of the law. While non-performance directly caused by government closures in many cases will be enough to excuse performance, a court is far less likely to excuse performance based on more general claims that the pandemic and attendant closures made performing contracts economically burdensome or undesirable due to changed markets or economic risk.19 Even significant increased costs or market uncertainty generally are not enough to excuse a party of its obligations. While parties are free to expressly allocate in their contract increased costs or the risks of market fluctuations, the default principles of impossibility, impracticability, and frustration of purpose hardly ever does it for them:
While it may be an overstatement to say that increased cost and difficulty of performance never constitute impracticability, to justify relief there must be more of a variation between expected cost and the cost of performing by an available alternative than is present in this case, where the promisor can legitimately be presumed to have accepted some degree of abnormal risk, and where impracticability is urged on the basis of added expense alone.22
LESSON IV: A temporary disability only suspends a contractual obligation; it does not permanently excuse it. When the thing that prevents performance no longer prevents it, performance generally is no longer excused. A dizzying number of cases hinge on this simple principle:
LESSON V: A partial disability may not suspend or excuse performance. Depending on the jurisdiction and the circumstances, it may be difficult for a business that has not been shut down completely to be excused of its obligations merely because the business was somehow hampered or restricted by a government order. Consider a manufacturer that is able to produce but at limited capacity due to the government shutdowns. Or a restaurant that is allowed to serve take-out food as opposed to full sit-down service. At what point short of a complete shutdown is performance impracticable:
LESSON VI: The party seeking to be excused must prove that it acted with diligence and in good faith to overcome the force majeure event. If a supplier finds it difficult to perform a contract due to a COVID-19 disruption, it will need to prove that it could not reasonably work around the disruption to perform the contract. Consider a simple COVID-19 example: if a government order prevented restaurants from conducting sit-down service but allowed take-out orders, suppose a restaurant opted not to do take-outs—can it argue that it should be excused of its rent obligation due to a force majeure event? Or if a business was shut down because it was non-essential, would it have been reasonable to attempt to obtain an exemption:
LESSON VII: A caution: there is little certainty in this area of the law. Mounting a successful defense to be excused of a contractual obligation due to a supervening event is often difficult. As discussed above, being excused is the exception— promises are supposed to be kept. Clients need to be counseled: force majeure should not be invoked lightly—if the party declaring force majeure gets it wrong, it may be in breach.29 Beyond that, as the cases above illustrate, courts look very carefully at the contract to assess how the parties allocated the risk and do not freely excuse parties from their obligations. The cases are often very fact-specific and leave courts a great deal of discretion. Sometimes, courts reach results that they think are fair without regard for the niceties of contract law:
Timothy Murray, a partner in the Pittsburgh, PA law firm Murray, Hogue & Lannis, writes the biannual supplements to Corbin on Contracts, is author of Volume 1, Corbin on Contracts (rev. ed. 2018), and is co-author of the Corbin on Contracts Desk Edition (2017).
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1. See Lisa Girion, Businesses Seek a Legal Escape From Terrorism, Los Angeles Times, Oct. 14, 2001, at C1. 2. Restatement (Second) of Contracts, Ch. 11, Introductory Note. 3. E.g., Taylor v. Caldwell, 3B. & S. 826, 32 L.J., Q.B. 164  (owner of a music hall was excused of liability for failing to make the hall available due to an accidental fire that destroyed the building). 4. Specialty Tires of Am., Inc. v. CIT Group/Equipment Fin., Inc., 82 F. Supp. 2d 434, 438–439 (W.D. Pa. 2000). 5. City of Starkville v. 4-County Elec. Power Ass’n, 819 So. 2d 1216, 1224 (Miss. 2002) (“[M]any courts even use the terms [impracticability and impossibility] interchangeably.”) 6. U.C.C. § 2-615 (“Excuse by Failure of Presupposed Conditions”). 7. 2 K.B. 740 . 8. Commonwealth Edison Co. v. Allied-General Nuclear Services, 731 F. Supp. 850, 855 (N.D. Ill. 1990). In Aquila, Inc. v. C. W. Mining, 2007 U.S. Dist. LEXIS 80276, *16 (D. Utah Oct. 30, 2007), C. W. Mining sought to be excused of its contractual obligation to supply coal, but the court held that it could not invoke the extra-contractual gap-filler doctrines because the parties’ contract contained a force majeure clause that expressly spelled out when supervening events would excuse performance. The terms of the force majeure clause—including a notice requirement—had not been satisfied, so “CWM cannot rely on common law defenses and the U.C.C., thereby circumventing the terms and limitations that the parties negotiated in the Contract.” 9. TEC Olmos, LLC v. Conocophillips Co., 555 S.W.3d 176, 183 (Tex. App. 2018). See Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957, 992 (5th Cir. 1976) (“[W]hen the promisor has anticipated a particular event by specifically providing for it in a contract, he should be relieved of liability for the occurrence of such event regardless of whether it was foreseeable.”); Perlman v. Pioneer P’ship, 918 F.2d 1244, 1248 (5th Cir. 1990) (“Because the clause labelled ‘force majeure’ in the Lease does not mandate that the force majeure event be unforeseeable or beyond the control of Perlman before performance is excused, the district court erred when it supplied those terms as a rule of law.”). See Sabine Corp. v. ONG Western, Inc., 725 F. Supp. 1157, 1170 (W.D. Okla. 1989) (“Plaintiff’s argument that an event of force majeure must be unforeseeable must be rejected. Nowhere does the force majeure clause specify that an event or cause must be . . . unforeseeable to be a force majeure event.”). 10. TEC Olmos, 555 S.W.3d 176. 11. 2012 N.J. Super. Unpub. LEXIS 457 (Mar. 2, 2012). 12. Sunshine Imp & Exp Corp. v. Luxury Car Concierge, Inc., 2015 U.S. Dist. LEXIS 60034 (N.D. Ill. May 7, 2015). 13. Ergon-West Va., Inc. v. Dynegy Mktg. & Trade, 706 F.3d 419 (5th Cir. 2013). 14. Bayou Place Ltd. P’ship v. Alleppo’s Grill, Inc., 2020 U.S. Dist. LEXIS 43960 (D. Md. Mar. 13, 2020). 15. Rembrandt Enters. v. Dahmes Stainless, Inc., 2017 U.S. Dist. LEXIS 144636 (D. Iowa 2017). 16. 2019 U.S. Dist. LEXIS 19264 (S.D. Fla. Feb. 5, 2008). 17. ARHC NVWELFL01, 2019 U.S. Dist. LEXIS 19264, *13. 18. ARHC NVWELFL01, 2019 U.S. Dist. LEXIS 19264, *14, n.1. 19. The increase in cost would have to be catastrophic: “In contracting for the manufacture and delivery of goods at a price fixed in the contract, . . . the seller assumes the risk of increased costs within the normal range. If, however, a disaster results in an abrupt tenfold increase in cost to the seller, a court might determine that the seller did not assume this risk by concluding that the non-occurrence of the disaster was a ‘basic assumption’ on which the contract was made. In making such determinations, a court will look at all circumstances, including the terms of the contract.” Restatement (Second) of Contracts, Ch. 11, Introductory Note. 20. OWBR LLC v. Clear Channel Communs., Inc., 266 F. Supp. 2d 1214, 1223 (D. Haw. 2003). 21. Id. Subjective impossibility—impossibility personal to the promisor due to, for example, its financial inability to perform—does not excuse performance. E. Capitol View Cmty. Dev. Corp. v. Denean, 941 A.2d 1036 (D.C. 2008). 22. Transatlantic Financing Corp. v. United States, 363 F.2d 312, 319 (D.C. Cir. 1966). 23. Kyocera Corp. v. Hemlock Semiconductor, LLC, 886 N.W.2d 445, 455 (Mich. Ct. App. 2015). The court noted that “if plaintiff had wished to protect itself from artificial market deflation because of government action (or, for that matter, excessive market downturns of any kind), it could have done so.” See also TPL, Inc. v. United States, 118 Fed. Cl. 434 (2014) (party assumed the risk in its contracts that changes in market conditions might occur and make its performance more expensive). 24. Slaughter v. C. I. T. Corp., 26 Ala. App. 234 (1934). 25. 25 Cal. 2d 48 (1944). 26. “[I]ndustry insiders knew [this] meant ‘Warner Brothers’ (W. for Warner, and Hermanos is Spanish for Brothers).” http://www.imdb.com/name/nm1149112/. 27. Warner Bros. Pictures, Inc. v. Bumgarner, 197 Cal. App. 2d 331. 28. Pennington v. Cont’l Res., Inc., 932 N.W.2d 897 (N.D. 2019). 29. See, e.g., Phillips P.R. Core, Inc. v. Tradax Petroleum Ltd., 782 F.2d 314, 321 (2d Cir. 1985) (“Phillips’ . . . refusal to pay on the grounds of force majeure constituted an anticipatory breach of the contract.”); Lazin v. Pavilion, 1995 U.S. Dist. LEXIS 15255 (E.D. Pa. Oct. 12, 1995) (repudiation may constitute a total or material breach that discharges the non-breaching party’s obligations). 30. Phelps v. School Dist., 302 Ill. 193 (1922) (the pandemic was unforeseen, and the school district could have inserted a clause excusing it of its obligations but did not); Montgomery v. Board of Educ., 102 Ohio St. 189, 193 (1921) (“The contingency which here occurred was one which might well have been foreseen and provided against in the contract, but was not.”); Crane v. School Dist., 95 Ore. 644, 655 (1920) (“‘Where no express or implied provision as to the event of impossibility can be found in the terms or circumstances of the agreement, it is a general rule of construction . . . that the promisor remains responsible for damages, notwithstanding the supervening impossibility or hardship.’”) (Citation omitted). 31. Gregg Sch. Tp. v. Hinshaw, 76 Ind. App. 503, 506 (1921) (“After the contract was entered into, and when the exigency arose, the health board, in the exercise of the police power delegated to it, closed the school, and the contract, for the time that the order was in force, was impossible of performance, and hence unenforceable, and there could be no recovery for such time.”); Sandry v. Brooklyn Sch. Dist., 47 N.D. 444, 449 (1921) (“Either party is excused if, without his fault, performance for a period becomes impossible. Such impossibility may arise upon the sickness or death of either party, or the inability of one party to give or receive performance, occasioned by the prevalence of an epidemic.”)