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03.18.2020 | Legal Advisory

The outbreak of COVID-19 has challenged businesses across the board in unprecedented ways. Major conferences and events have been cancelled, restaurants across the country are closing down, and supply chains have been disrupted. Locally, Boston Mayor Marty Walsh ordered a suspension of all ongoing construction projects in Boston—halting a massive amount of work across the city, surely causing long project delays, and likely precipitating litigation down the road. Forced to consider the reality that many contractual obligations are becoming impracticable (if not impossible), companies are encouraged to consider the availability of force majeure clauses in their contractual agreements and whether those clauses may excuse nonperformance given the widespread impact of the COVID-19 virus.

What are force majeure clauses?
Force majeure clauses are commonly included in a variety of contracts to allocate risk among the parties for unpredictable intervening events, out of the parties’ control, that affect the ability of one or both parties to perform under the contract. Typically, those unpredictable events include natural disasters or “acts of God,” including earthquakes, hurricanes, and catastrophic storms, as well as human-caused disruptions like labor strikes, civil war and unrest, and terrorism. Although less common, sometimes a force majeure clause specifically lists a global pandemic as a qualifying event. Some clauses enumerate certain events that constitute a force majeure event (such as those detailed above) while others are written more broadly.

If not specifically defined, an event constituting force majeure is one that is “construed as unforeseeable, unanticipated, or uncontrollable.” Harper v. N. Lancaster, LLC, 95 Mass. App. Ct. 1119 (2019). For example, the U.S. Court of Appeals for the First Circuit found that the Iranian revolution, which resulted in suspension of all U.S. export licenses to Iran, was a force majeure event sufficient to relieve performance of an American company’s obligations to sell certain optical technology to Iran. Itek Corp. v. First Nat. Bank of Bos., 730 F.2d 19, 26 (1st Cir. 1984). Garden variety business disruptions, however, rarely will constitute a force majeure event and relieve the breaching party from performance. Courts usually will not excuse performance based on the obligor’s inability to pay or financial unpreparedness. See TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176, 183 (Tex. App. 2018) (citing Valero Transmission Co. v. Mitchell Energy Corp., which stated that “a contractual obligation cannot be avoided simply because performance has become more economically burdensome than a party anticipated.”).

The COVID-19 outbreak, however, is far more likely to qualify as a force majeure event than an ordinary business disruption, as it is affecting nearly every aspect of commercial life. It seems clear that businesses suffering financially soon will start to default on their obligations. As such, in interpreting whether a breach is excused due to COVID-19 under a force majeure analysis, courts may look closely at whether the pandemic is truly the cause of the nonperformance, or whether the virus’s impact on a company’s profits is really the cause of nonperformance. See Hong Kong Islands Line Am. S.A. v. Distribution Servs. Ltd., 795 F. Supp. 983, 989 (C.D. Cal. 1991), aff'd, 963 F.2d 378 (9th Cir. 1992) (“It is well-established that in order to constitute a force majeure, an event must be the proximate cause of nonperformance of the contract.”). In other words, the fact that a company is losing money fulfilling its contractual obligations, standing alone, is insufficient to trigger a force majeure clause.

The language in the agreement also will determine what performance is excused should a force majeure event occur. For instance, some force majeure clauses relieve the obligor entirely from performance, triggering termination or rescission of the contract, whereas others allow for a delay in performance only while the force majeure event is ongoing. Compare the differing effects on the hospitality industry versus the construction industry—while hotels, exhibition centers, and restaurants are permanently cancelling events (i.e. rescinding entire contracts), construction projects stalled by Mayor Walsh’s order will be delayed for some period of time. Although both industries could be equally devastated by this outbreak, the extent to which contractual performance may be excused may differ. Companies will want to look closely at how the language in each particular force majeure clause can mitigate these disruptions within the context of their particular businesses.

Notice
Most force majeure clauses require the relying party to give the other party notice of their expected nonperformance within a certain time period after the force majeure event. Situations impacting operations often are a question of degree—companies now may be attempting to perform notwithstanding the escalating disruption. But at what point does a force majeure event arise, thus starting the clock on the nonperforming party’s obligation to give notice? See Aquila, Inc. v. C.W. Mining, 545 F.3d 1258, 1266 (10th Cir. 2008) (distinguishing between a party’s actual notice of mining companies’ geological difficulties and the mining company’s required notice that it considered the geological problems to be a force majeure event excusing performance). In these situations, it is best to seek advice of counsel about the contract at issue and give notice as soon as practicable.

Other doctrines excusing nonperformance
Even if your agreement does not contain a force majeure clause, there are other common law doctrines that may excuse nonperformance. Under the companion rules of impossibility and frustration of purpose—and the UCC analog, “commercial impracticability”—some unanticipated supervening event makes “performance vitally different from what was reasonably to be expected.” Chase Precast Corp. v. John J. Paonessa Co., 409 Mass. 371, 374 (1991) (citations omitted). For an impossibility defense, the supervening event makes performance commercially impossible, whereas in the context of frustration of purpose, both parties technically can still perform, but the supervening event destroys the value underlying the agreement. Lloyd v. Murphy, 25 Cal. 2d 48, 53 (1944).

Either argument may become relevant during the COVID-19 epidemic. In the context of large-scale event cancellations, an appellate court in Arizona refused to find the purpose of an agreement with a resort to host its international sales meeting frustrated when attendance plummeted due to fear of terrorism during the U.S.’s involvement in the Gulf War. 7200 Scottsdale Rd. Gen. Partners v. Kuhn Farm Mach., Inc., 184 Ariz. 341, 350 (Ct. App. 1995). Finding that the impact of the Gulf War on domestic travel was slight, the court held that the company’s cancellation was not an objectively reasonable response to the threats of terrorism. Where cities are banning large assemblies and the federal government has imposed travel bans to certain countries, a stronger argument likely can be made under the frustration of purpose doctrine amidst COVID-19 than in circumstances like the first Gulf War.

What should you do?
First, reach out to a trusted lawyer to determine whether your company’s contractual obligations contain force majeure clauses, and if so, what events are contained within the defined term, if there is one. You and your attorney should also review your contracts to determine what other provisions might affect your rights and obligations in this uncertain time. Establishing your position, as well as discussing the situation and trying to reach a resolution with your business partner, may well be the best course of action in the short term. Events are moving quickly, and the best advice right now is to try to protect your company against any long-term consequences.

This advisory was prepared by Sarah Kelly, chair of Nutter’s Litigation Department, and Maya Ginga, an associate in the Litigation Department. For more information, please contact Sarah or your Nutter attorney at 617.439.2000.

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.