Contract Performance during COVID-19 Force Majeure, Acts of God, and the Impossibility of Performance, 0720 COBJ, Vol. 49, No. 7 Pg. 22

Author:BY MIKE CROSS
Position:Vol. 49, 7 [Page 22]

49 Colo.Law. 22

Contract Performance during COVID-19 Force Majeure, Acts of God, and the Impossibility of Performance

Vol. 49, No. 7 [Page 22]

Colorado Lawyer

July, 2020

CONTRACT LAW

BY MIKE CROSS

This article discusses how force majeure provisions and common law defenses may operate to excuse contract performance during the C0VID-19 pandemic.

As the COVID-19 pandemic derails and disrupts industries throughout the world, parties find themselves flipping to the back of their lengthy contracts to dust off an often included and more often ignored provision: the force majeure clause. But will they find salvation there? How will courts interpret force majeure clauses in the new world shaped by the COVID-19 pandemic? And how should parties move forward?

What Constitutes Force Majeure?

The French term "force majeure" translates literally to "superior strength." Black's Law Dictionary defines the concept as an "event or effect that can neither be anticipated nor controlled" that "prevents someone from doing something that he or she had agreed or officially planned to do."1 Many contracts contain force majeure clauses excusing performance under such unanticipated circumstances.

The term force majeure is often conflated with the phrase "act of God." They have different meanings and scope. An "act of God" or vis major, is an extraordinary and uncontrollable natural disaster or irresistible "superhuman" cause that impedes performance.2 Force majeure clauses in contracts typically excuse performance under such circumstances. But force majeure clauses often go further by including a comprehensive "parade of horribles"[3] natural and unnatural, that excuse performance in whole, in part, or only temporarily, depending on the language and the circumstances. Parties to a contract can negotiate and include any number of specific scenarios, including events that are foreseeable and within the parties' control.4

Even where a force majeure clause does not explicitly include the claimed event, it may still provide relief, because the inability to foresee the occurrence of a force majeure event is a fundamental rationale for the clause. Often, our most important failure is one of imagination. For that reason, most force majeure clauses contain a "catchall" provision, such as "any other emergency beyond the parties' control, making it inadvisable, illegal, or impossible to perform their obligations under this Agreement."5

As one can imagine, these provisions generate most of the litigation relating to force majeure clauses. For example, in 2008 Donald Trump filed an action claiming that the "biggest depression we have had in this country since 1929" constituted an "event or circumstance not within the reasonable control of the borrower" in an attempt to escape a $40 million personal guaranty (he also sought S3 billion for damage to his reputation).6

Construing the Clause

When construing force majeure clauses, the question, ultimately, is what situations did the parties intend to constitute a n excuse for performance? For guidance, courts often rely on the doctrine of ejusdem generis, which holds that when "general words follow an enumeration of two or more things, they apply only to . . . things of the same general kind or class specifically."[7] Courts interpret these provisions narrowly and are reluctant to give the general words of the catchall provision expansive meaning.8

Most courts have held that economic hardship alone does not qualify.9 For instance, courts have rejected attempts to invoke force majeure clauses in response to the 1986 collapse of the crude oil market,10 the "worldwide economic meltdown" of the Great Recession,11 and the "trade war" with China, involving tariffs and allegations of Chinese market manipulation.12 Unprofitability alone is usually insufficient, especially in sales contracts where price fluctuations are common and a party may be unwilling, but not "unable," to perform.13 However, this does not preclude the parties from specifically stating in the force majeure clause that changing economic conditions such as market collapse, price fluctuations, or recession excuse performance.14

The COVID-19 Effect

To determine whether the COVID-19 pandemic constitutes a force majeure event sufficient to excuse performance, the starting point is the enumerated horribles. While not common, the terms "pandemic" and "epidemic" do appear in many such clauses. For instance, after canceling the remainder of its season, it did not take long for the NBA to locate the term "epidemic" in the force majeure clause of its collective bargaining agreement and start proposing player salary reductions.15

Even if those terms are not explicitly included, others might qualify, such as "government regulation," "supply disruption," or "regulatory action." Such terms are often included in force majeure clauses and could excuse performance where the...

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