The Effect of COVID-19 on Your Ability to Fulfill Contract Obligations: Invoking Force Majeure and Impossibility Doctrines
Apr 24, 2020
In an effort to slow the spread of the novel coronavirus, governments around the world have ordered their citizens to hold in place. There is no indication of when these restrictions will be lifted. Naturally, this has had a huge effect on people’s ability to conduct business around the world. Many business owners, especially in trade and logistics, must face the reality that they will be, or already are, in breach of any number of contractual obligations.
Parties concerned they may not be able to fulfil their obligations for reasons related to the coronavirus pandemic should be examining their ability to invoke a force majeure clause or alternatively, to seek relief under the doctrines of impossibility, impracticability or frustration.
Enforcement of the Force Majeure Clause
Most commercial contracts contain force majeure clauses, which direct how the parties should respond and allocate liability if unforeseeable circumstances arise and prevent either party’s performance. Force majeure clauses contain two parts: (1) a definition of force majeure in the context of the parties’ agreement, i.e. a list of “triggering events,” and; (2) an operative clause that dictates the rights and obligations of the parties if a triggering event occurs. Triggering events commonly included in force majeure clauses that are implicated by the coronavirus pandemic include: issuance of quarantine orders, disruption of supply chains, disruption of transportation systems, issuance of national emergency orders, and acts of government. In the wake of the huge disruption caused by the coronavirus pandemic, parties should begin scrutinizing their force majeure clauses to determine what events trigger application. It is always best to be prepared prior to invoking a force majeure clause, rather than scrambling to hide behind one after the fact.
Another reason to prepare in advance is that most force majeure clauses contain notice and mitigation requirements. For example, parties are usually required to notify the other party within a certain time period once they learn that a force majeure event will prevent their performance under a contract. Parties are also usually required to begin actively mitigating any losses caused by the force majeure event as soon as they become aware of it. It is important for parties to be proactive; notice must be provided in a timey fashion and mitigation efforts put into action. If a party fails to provide notice in time, they may lose their right to limit liability under a force majeure clause. Alternatively, if a party fails to document its efforts to mitigate damages they may be held liable for a failure to mitigate. Parties should retain all documentation relating to the date at which the party became aware of the force majeure event and its effect, the effect of the force majeure event, the measures taken to mitigate its effect. A savvy party will already have systems or plans in place to maintain such documentation to support enforcement of a force majeure clause.
Finally, jurisdiction is an important factor in deciding whether to invoke a force majeure clause at all. Traditionally courts required that force majeure events were “unforeseeable.” However, application of this rule is not universal among the judicial jurisdictions. Some courts require that the intervening act is completely unforeseeable whether the force majeure clause mentions unforeseeability or not. Other courts, for example those in Texas and Delaware, only require unforeseeability if it is required under the terms of the force majeure clause. These courts focus on how the contract defines a force majeure event and only impose requirements of unforeseeability or unavoidability, if they are expressly required in the contract’s language.
A party planning to invoke a force majeure clause must carefully review the law applicable to their contracts. Interpretation of force majeure clauses by courts across the many different jurisdictions in the United States is a complex issues, far beyond the scope of this article. Parties should seek competent legal counsel to determine what jurisdiction’s laws apply to their contracts and how the courts of that jurisdiction interpret force majeure clauses.
What If I Don’t Have a Force Majeure Clause?
Not all commercial contracts contain force majeure clauses. Some contracts may contain force majeure clauses that are not implicated by any of the events surrounding the coronavirus pandemic. In the United States, parties can look to the common law doctrines of impossibility, impracticability, or frustration. These common law doctrines can provide relief for a party that is unable to perform due to an intervening unforeseeable event. However application of either doctrine is fraught with difficulty. Courts are loath to release parties from their contractual obligations when it will impose a loss on the innocent non-breaching party. United States law places considerable emphasis on honoring the express terms of a commercial contract, even if this works a considerable injustice on one of the parties. To successfully invoke the doctrine of impossibility, a party must prove that their performance under the contract was rendered impossible by an unforeseeable intervening event. Successfully invoking this doctrine is particularly difficult in some jurisdictions, because courts interpret “impossible” quite literally. If there is any possibility whatsoever that the party can still perform on the contract, no matter how onerous performance has become, the doctrine of impossibility does not apply. Some jurisdictions, including California, employ a less strict test, referred to as the doctrine of impracticability, whereby the parties may be released from contractual obligations by proving that their performance was rendered impractical due to excessive or unreasonable expense. While easier to prove than impossibility, the doctrine of impracticability still presents a very high bar and is exceedingly difficult to prove.
The doctrine of frustration applies when the purpose of a contract is frustrated; the classic example being that of the painter hired to paint a house which burns down before work can begin. To successfully invoke the doctrine of frustration, a party must prove that an unforeseeable intervening event has occurred which entirely frustrates one party’s purposes for the contract. The key inquiry is whether the intervening event actually renders a party’s performance completely purposeless. Invoking frustration is difficult because courts generally deny its application if there is any chance at all that a party’s continued performance would yield some benefit, however small.
As is the case with application of a force majeure clause, the application of the doctrines of impossibility, impracticability and frustration vary from one jurisdiction to another. Before deciding whether to invoke any of these doctrines, parties should determine what jurisdiction’s laws apply to their contracts and how the courts of that jurisdiction interpret force majeure clauses.
In some cases it may actually be more beneficial for a party to seek relief under the common law doctrine of impossibility or impracticability, even if the party has the option of invoking a force majeure clause. In many cases a force majeure clause will seek to avoid a complete termination of the contract and still bind the party to some obligations. For example, a force majeure clause may specify that performance will be delayed or suspended for a period of time but not cancelled entirely. The same party may be able to completely free itself of its obligations under the doctrines of impossibility, impracticability or frustration.
However, there is some tension between the operation of force majeure clauses and the common law doctrines of impossibility, impracticability and frustration. In theory, these common law doctrines overlap with force majeure clauses, in that they all operate to allocate liability in the case of unforeseeable events. However most force majeure clauses contain lists of triggering events, which indicates that these events, at least, were not unforeseeable to the parties at the time of contracting. A party may not be able to claim relief under either of the common law doctrines for an event that is referenced in their force majeure clauses. This is because, having contracted for its possibility at the outset, they will not be able to claim that the event was actually unforeseeable.
Contracting parties should also bear in mind that “foreseeability” is a constantly shifting standard. As events become more commonplace, they also become more foreseeable. This is why relying on common law doctrines that require unforeseeability is risky. In 2000 parties may have been able to argue that a global pandemic was a cataclysmic event, the consequences of which were entirely unforeseeable. In 2020 this is no longer the case. In the wake of SARS, H1N1, and now COVID-19, viral outbreaks effecting commerce on a global scale are no longer as surprising as they used to be. This means that proving unforeseeability in the context of the common law doctrines of impossibility, impracticability, and frustration will become increasingly difficult, at least with respect to viral outbreaks or pandemics.
Some Advice for Our Brave New Future
In the age of extreme weather events and global pandemics, the lowly force majeure clause is beginning to garner more attention. Contracting parties should not gloss over the language in a force majeure clause, or settle for something boilerplate, such as defining a force majeure event as “Any act of god.” Parties must make careful consideration of the applicable law in the jurisdiction where the force majeure event is likely to be enforced, which is a complex analysis in and of itself. While many contracting parties believe that force majeure clauses are unimportant or unlikely to be enforced, they are actually an important aspect of liability allocation in contracting and should be given careful consideration.
About the author
The International Maritime Group (IMG) is a boutique law firm that provides tailored legal services to businesses, financial institutions, and governments. Our firm has a reputation for solving complex legal problems—on time and under budget. Our aim is to always be more than just our clients' attorneys, but their trusted advisors as well.