[COVID-19] Force Majeure Contract Clauses

May 6, 2020 by Anthony F. Geraci, Esq.

Force majeure clauses are found in most contracts, usually in the boilerplate. Most people don't even read it, much less think about it...until you need to.

What happens when the world changes overnight, and the amazing deal you’re looking to close becomes a nightmare?

Force majeure clauses have their history dating back to French civil law. Historically, force majeure clauses have been traditionally included to cancel contracts because of acts of God, wars and strikes, or other major catastrophes, events in which proceeding with the contract would not make sense for the contracting party.

Force Majeure Contracts, in General

Typically, force majeure clauses are activated when the following elements are present:

  1. The contemplated force majeure could not have been reasonably foreseen by the contracting parties,
  2. It was completely beyond the party’s control, they did not aid in it, and there was nothing they could do to prevent it; and
  3. It renders the performance of the contract impossible or impractical.

Further, the force majeure clause can be as broad or as constrictive depending on the parties negotiating the contract.

How California, New York, Illinois, Texas, and Florida look at Force Majeure clauses

Combined, New York, California, Texas, and Florida are the hotbeds of legal activity, largely due to their populous states. Thus, these states, along with Illinois (Chicago), steer the large body of legal opinions other states will look to and potentially rely upon.

New York

New York first looks at whether a clause lists the specific event claimed to be preventing performance. Some force majeure clauses do list “epidemics” or “pandemics” as force majeure events. Since the World Health Organization has listed coronavirus as an pandemic, the claiming party would have a strong argument to get out of the contract (see, e.g., Philbro Energy, Inc. v. Empresa De Poilimeros De Sines Sarl, 720 F. Supp. 312 (S.D.N.Y. 1989).  Even if a contract does not contain a pandemic clause in its force majeure list, coronavirus could be covered as an act of governmental authority in some areas, depending on whether the government has instituted lockdowns to prevent the spread of the coronavirus.

However, even if you do have the force majeure clause with the above in your contract, there is additional analysis needed. In New York, for instance, the force majeure event must be unforeseen, and the party seeking to invoke the force majeure clause must attempt to perform its contractual duties despite the event (See id. At 318).

Texas

On the flip side, Texas does not require that the force majeure event be unforeseeable (See, e.g., Perlman v. Pioneer Ltd., 918 F.2d 1244, 1248 (5th Cir. 1990) – “Because the clause labeled ‘force majeure’ in the lease does not mandate that the force majeure event be unforeseeable or beyond the control Perlman before performance is excused, the district court erred when it supplied those terms as a rule of law.”).

Florida

Florida is stricter with its requirements, requiring a party seeking to invoke the force majeure clause in the contract to show that the force majeure event was (1) unforeseeable and (2) outside the party’s control (See Florida Power Corp. v. City of Tallahassee, 18 So.2d 671, 675 (Fla. 1944)).

California

In California, force majeure is not necessarily limited to the equivalent of an act of God, but the test is whether, under the particular circumstances, there was such an interference without the party’s intervention as could not have been prevented by the exercise of prudence, diligence, and care (See Mathes v. City of Long Beach, 121 Cal. App. 2d 473, 477 (2nd Dist. 1953)). Most importantly to our analysis of real estate contracts, California courts have held that just because the expense to perform on the contract is higher does not excuse the performance, unless there exists extreme and unreasonable difficulty, expense, injury, or loss involved (See Butler v. Nepple, 54 Cal. 2d 589, 598 (Cal. 1960) – affirming the judgment against Nepple for an increased lease due to a perceived higher expense for drilling operations).

As seen by the cases above, there are a few nuances to the basic force majeure law incorporated by states. New York is looser, Florida and California stricter, and Texas and Illinois somewhere in between. As is usually the case, the question comes down to what is included in the contract. Businesses seeking to invoke the force majeure clause of their contracts likely have a strong argument that the coronavirus outbreak is an unforeseen event, unless the parties entered into the contract after the outbreak of coronavirus. Whether businesses have also attempted to perform their contractual duties despite the coronavirus outbreak, and whether that is even required under a particular contract, are questions that must be assessed on a case-by-case basis.

What if there isn’t a force majeure clause in the contract?

If you do not have a force majeure clause in your contract, there are still other options that could potentially excuse your performance, including the defenses of impossibility and impracticability. The Uniform Commercial Code (“UCC”), a model law that most states adopt, states that a seller is excused from performing under the obligations of the contract when the “performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable . . . governmental regulation or other whether or not it later proves to be invalid.” UCC § 2-615(a).  Further, the Second Restatement of Contracts defined impossibility as “not only strict impossibility but impracticability because of extreme or unreasonable difficulty, expense, injury or loss involved.” (Second Restatement of Contracts § 254)

The United States federally declared an emergency related to Coronavirus, and several states are operating under lockdown / some limitation of the ability to do business. As a result, even if your contract does not contain a force majeure clause, there is a possibility that you are able to have your contract voided as a result. Keep in mind, however, that a strict economic remedy is tough to overcome, and more needs to be included in an impossibility or frustration of purpose argument.

Conclusion

Force Majeure clauses should be included in every contract. However, if yours doesn’t have one, you’re going to need to review your contract and speak with a competent attorney to discuss the merits of your case.  You may have a strong argument depending on the contract.

If you have questions about force majeure clauses, reach out to Geraci Law Firm here.

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