As of today, March 13, 2020, it’s hard to imagine there is not a person anywhere who has not been effected by the COVID-19 pandemic. Our Hong Kong-based clients at Ludwig, APC have been dealing with the outbreak for several months and already endured extensive, government-mandated shutdowns and quarantines. Here in the United States, it’s now our turn and we bear witness to the economic upheaval and massive disruption in our daily lives.
An unfortunate outcome to everything from a slight economic downturn all the way up to a catastrophic national emergency is always litigation. Deals fall apart. Promises are broken. Things happen. People and businesses rightly get upset, then they call their attorneys. The COVID-19 outbreak will be no different.
But, what of all the shutdowns, cancellations, travel bans, and such going on with COVID-19? Are contracts enforceable in this environment? Is there a defense to a breach of contract claim when the world goes on lockdown? In typical attorney-speak, the answer is, “It depends.” And it may depend on whether the contract at issue includes a “force majeure” clause. The phrase “force majeure” means “an event that can neither be anticipated nor controlled.” Black's Law Dictionary at 673-74 (8th ed. 2004). A force majeure clause is “[a] contractual provision allocating the risk of loss if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled.” Blacks Law Dictionary 718 (9th ed. 2009). If drafted properly, it can be a sort-of escape hatch excusing performance on a contract, due to events or circumstances wholly outside the parties’ control.
To begin, the concept of force majeure will only be relevant if the contract at the center of the lawsuit has a force majeure clause. If not, the analysis stops there and even a COVID-19 pandemic will not excuse performance due to force majeure, but there may be a common law defense of impossibility. On the other hand, if you hired a good lawyer to draft and negotiate the contract, it should have some sort of force majeure provision.
That’s not the end of it, because California law takes a narrow view of force majeure clauses. First, courts require that each event claimed to be a “force majeure” be beyond the control of the breaching party. Watson Labs., Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099, 1111 (C.D. Cal. 2001). Further, if the parties include an enumerated list of applicable events, i.e., a list of bad things that might happen, a court will likely hold the parties to the list, rather than applying a more general common-law interpretation. See, e.g., Commonwealth Edison Company v. Allied-General Nuclear Services, 731 F. Supp. 850, 855-56 (N.D. Ill. 1990) (Posner, J.) (finding that because the parties “dealt with the question of regulatory force majeure with considerable specificity. . . . it is the contract, rather than a body of judicial doctrine, that I must interpret”); Perlman v. Pioneer Limited Partnership, 918 F.2d 1244, 1248 (5th Cir. 1990) (“The language in the force majeure clause . . . is unambiguous and its terms were specifically bargained for by both parties. Therefore, the [common law] ‘doctrine’ of force majeure should not supersede the specific terms bargained for in the contract.”). Finally, in a commercial setting, the force majeure event must also have been unforeseen at the time the contract was executed. Interpetrol Bermuda, Ltd. v. Kaiser Aluminum Int'l Corp., 719 F.2d 992, 999 (9th Cir. 1983). This raises the question, was a pandemic like COVID-19 foreseeable when a contract was executed? Maybe it was, maybe it wasn’t.
With recent history filled with episodes of SARS, MRES, Bird Flu, Swine Flu, and Ebola, to name a few, some could argue COVID-19 might be a novel virus, but it’s definitely not a novel problem. The idea of a serve, worldwide pandemic has been entirely foreseeable for years, some might insist. Others might contend that the fallout from COVID-19 is unprecedented and unparalleled, qualifying as completely unforeseeable. How courts treat failed contracts and busted deals, frustrated by COVID-19, remains to be seen. Will a well-crafted force majeure carry the day or will past experience immunize a contract to that defense? One thing for sure is that we can help get you through this.