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Force Majeure Considerations in the Context of the COVID-19 Pandemic
With the onset of the COVID-19 pandemic, and its attendant “stay at home” orders shutting down large swaths of the economy, many are looking to “force majeure” as a defense to contractual obligations. The viability of that defense requires a fact intensive inquiry and an analysis of the contract language and pertinent order(s).
Force majeure is a contract provision that expects the unexpected. The term “force majeure” implicitly encompasses the common law defenses of impossibility/impracticability and frustration of purpose and provides for the occurrence of unforeseeable events that are out of the control of either party. It can also be a specific contract clause, in which case, it is assessed differently. Boilerplate force majeure clauses will be interpreted in light of the common law doctrine while a specifically-negotiated force majeure clause will be interpreted using contract principles.
I. Common Law Doctrines
The common law defense of impossibility or impracticability arises where a party’s own performance is rendered objectively impossible due to the destruction of the subject matter of the contract or by operation of law. Generally, a party asserting a defense of impossibility must show that the circumstances creating the impossibility were not, and could not, have been anticipated by the parties at the time of contracting; the party asserting the doctrine did not contribute to the circumstances; and that it has tried all practical alternatives available to permit performance. The defense is narrowly applied and requires more than a showing that performance is more difficult or expensive. Performance must be objectively impossible.
Frustration of purpose, or commercial frustration, is invoked when a party wants to rescind a contract because the other party’s performance has become worthless. Like impossibility, it relies on the view that when entering into the contract, the parties made their bargain based on the continued existence of a particular condition or state of things. With commercial frustration, though, an unforeseen change in those circumstances renders one party’s performance meaningless, and as a result, the other party can rescind the contract. Commercial frustration is applied narrowly and only when its proponent has shown that the frustrating event was not reasonably foreseeable and the value of counter performance by the other party has been totally or nearly totally destroyed by the frustrating cause.
II. Negotiated Force Majeure Clauses
Impossibility and commercial frustration have been referred to as “gap fillers” and “off-the-rack” provisions. They only govern if the parties have not drafted a specific assignment of the risk otherwise. If the contract contains a force majeure clause, it will be interpreted in accordance with its language and context, like any other provision in a written contract. That is to say, the doctrines of impossibility and commercial frustration will not supersede the specific terms bargained for in the contract. If the event that interferes with a party’s performance is not specifically addressed by the force majeure clause, it is not likely to excuse performance even if fits the criteria of impossibility or commercial frustration.
III. Executive Stay at Home Orders
Virtually every state has some form of executive order in place that affects every sector of the economy. Construction projects are some of the most common scenarios for the play out of force majeure considerations given the contractual link between the myriad trades, services, material suppliers, utilities and professional services involved. States like Michigan have shut down all construction except large public works projects, whereas other states, like Illinois, Indiana, Ohio, and Wisconsin, have deemed most construction projects and related businesses “essential,” and thus, they remain open as do the manufacturing companies, distributors, and supply chain companies producing and supplying essential products and services to them. Depending on the facts, an executive order can be both the cause of a lawsuit and the defense to it.
IV. Force Majeure in Context
As an example, assume that, as a result of the COVID-19 pandemic, a supplier for a construction project cannot perform on its contract and cannot get Contractor A the materials it needs to perform on its contract with the general contractor in a timely manner. That supplier’s failure to perform might have a ripple effect throughout the project, causing resultant delays on the part of Contractor A, the general contractor, and several other contractors. If litigated, force majeure will likely come into play, but the outcome will differ considerably depending on whether there is an explicit force majeure clause in place and how that clause was drafted.
A. The Contract Does Not Contain a Force Majeure Clause
If, in the above scenario, the general contractor sues Contractor A, and there is no force majeure clause, Contractor A is likely to cite impossibility as a defense, claiming it could not perform because it did not have the necessary materials. Because Contractor A knew it would have to rely on a third party’s performance when it entered into the contract with the general contractor, though, the impossibility defense is unlikely to prevail. Courts do not generally regard the inability to control the actions of a third person whose consent or cooperation is needed for performance of an undertaking as impossibility unless the terms or nature of the contract indicate that this risk was not assumed.
On the other hand, if Contractor A’s supplier could not perform because a statute, regulation, or other governmental action like an executive stay at home order, rendered it illegal, Contractor A’s impossibility defense holds more weight, particularly if every supplier of the necessary material is affected by the same or similar order.
B. The Contract Contains a Boilerplate Force Majeure Clause
The standard AIA A201-2017 General Conditions form does not have a specifically designated force majeure clause, but Section 8.3.1 “Delays and Extensions of Time” contemplates a few scenarios that would excuse timely performance. That Section reads as follows:
§ 8.3 Delays and Extensions of Time
§8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section 22.214.171.124, or other causes beyond the Contractor’s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.
In this case, the boilerplate force majeure clause happens to address the situation so there is no need to resort to common law principles. Contractor A could credibly cite the “unusual delay in deliveries” and “other causes that . . . justify delay” provisions in its defense.
C. The Contract Contains a Negotiated Force Majeure Clause
Suppose, though, that the contract contained the following negotiated clause:
Definition of Force Majeure. The term ”Force Majeure” shall mean an act of God, fire, tornado, hurricane, flood, earthquake, explosion, war on American soil, act of terrorism on the Project, civil disturbance, labor strikes, an unusually severe storm designated as a 50-year storm or greater by the National Climate Data Center, or an unavoidable casualty beyond Contractor’s control, where any such event is not caused by the negligent act or omission of Contractor or Subcontractor or someone else for whom Contractor is responsible.
Ironically, Contractor A’s force majeure argument would be undercut significantly by this negotiated clause because it does not specifically address epidemic, pandemic, disease or governmental act. Contractor A could argue that the COVID-19 pandemic is an “act of God,” but the clause will be narrowly construed and the analysis will be fact intensive. Courts often interpret “act of God” as an occurrence that was not influenced by man, and focus on whether the event was truly out of the party’s control. Consequently, the analysis in this scenario will require a deep dive into exactly why Contractor A could not perform, and how preventable that event was. The court might get into questions of whether or not the COVID-19 pandemic was set in motion by man, whether nonperformance was caused by the pandemic generally or an individual’s sickness, and if the latter, how preventable or foreseeable that was.
There is no simple answer as to whether the flood of litigants sure to come from the COVID pandemic will be able to successfully invoke common law defenses to contract performance or rely on force majeure clauses. The facts and circumstances of each case will have to be carefully considered.
The attorneys at Gunty & McCarthy have extensive experience representing the interests of parties to a contract and continue to monitor and assess the impacts of COVID-19 for their clients. For more information, or to learn how we can help you, please contact Jim Walton.