COVID-19’s Impact on Contractual Obligations and Force Majeure

The coronavirus crisis forces businesses to assess how the doctrine of force majeure will affect their contracts. A force majeure (FM) clause is commonly found in contracts and relieves parties from obligations under the agreement if an extraordinary event makes it impossible, or highly impracticable, for a party to perform its obligations.¹ Under New York law, courts will consider excusing a party’s performance if an FM clause is included in an agreement.²

Force Majeure Clauses

A New York court’s FM analysis is tightly tied to the contractual language specific to each agreement. FM clauses generally fall into three categories:

(1) “Catch-all” clauses. These are deliberately broad and intended to capture a variety of FM events without enumerating them. A “catch-all” clause may state: “The obligations of a Party hereunder shall be suspended during the period for which such Party is unable to perform such obligations by reason of an FM Event.” An “FM Event” is defined as “any event or condition that directly or indirectly prevents a Party from performing an obligation hereunder, is beyond the reasonable control of such Party, and could not, by the exercise of due diligence, have been avoided in whole or in part by such Party.” Significantly, New York courts interpret such “catch- all” clauses narrowly. New York courts excuse performance only if the clause specifically lists the event that actually prevents a party’s performance, or where the event is of the “same kind or nature” as the events included in the FM clause.³ Therefore, a New York court is unlikely to interpret a pandemic as an FM event in the above example. However, FM clauses can alternatively take a “laundry list” approach even while including a “catch-all” clause at the end. For example, consider an FM event defined as “any act of God, natural disaster, war, acts or threats of terrorism, unavailability of supplies, national emergency, act of any governmental authority, or other similar causes beyond the control of such party.” In this example, a New York court is more likely to interpret the pandemic and related stay-at-home orders as FM events, as these circumstances are of the same kind or nature as a national emergency and act of governmental authority.

(2) “Laundry list” clauses. These enumerate specific FM events. When a clause lists out such events or contains open-ended language related to such events, New York courts generally find FM only as to those specific events or situations that are similar in nature.⁴ For example, consider the previous definition of an FM event and add the following language: “... and including: any act of God, natural disaster, war, riot, civil war, blockade, insurrection, terrorism, sabotage, acts of public enemies, civil disturbances or general restraint or arrest of government and people, boycott, strike, lockout or other similar industrial disturbance.” As was found by a court in the 9/11 context, a “laundry list” FM clause will likely apply in the current situation if it includes words such as “pandemic,” “disease,” “quarantine,” “government order,” “government regulation,” “government acts” or other similar words.⁵

(3) Acts of God. FM events are also often described as “acts of God.” Such language has often been interpreted by courts as being limited to natural occurrences, such as hurricanes, floods, earthquakes and other similar events. Given the nature of the pandemic, which reasonably could be interpreted as a “natural occurrence,” the application of an “act of God” provision to COVID-19 will most certainly be asserted by affected parties, and its applicability is likely to lead to future litigation.

Force Majeure Clause Analysis

Even when a contract includes a clearly applicable FM clause, for the FM to excuse performance, New York courts require that (1) the event be unforeseeable and (2) performance of the contractual obligations has indeed become impossible.

(1) An unforeseeable event. If a contract contains an FM clause that may apply to COVID-19, New York law still requires that “neither party could foresee or guard against” such an event.⁶ Therefore, if an agreement was negotiated before the worldwide spread of the COVID-19 virus, one could argue that a global pandemic of this scale was unforeseeable. However, if the agreement was negotiated after countries began imposing lockdowns, it may be harder to argue that stay-at-home orders in the U.S. were unforeseeable and could not be guarded against.

(2) An impossible performance. Mere “impracticality” or “unanticipated difficulty” is not enough to excuse performance.⁷ Instead, courts will excuse nonperformance only when performance has been made impossible.⁸ After Sept. 11, 2001, a New York court noted that unforeseeable government action (i.e., the virtual lockdown of New York City in the days following the terrorist attacks) that makes performance legally impossible excuses contractual performance.⁹ Depending on the nature of an agreement, parties will have to evaluate whether performance has in fact been made impossible by COVID-19 and related government orders. Parties to agreements whose contractual obligations can be performed remotely, such as the provision of software as a service, may have a difficult time arguing that performance has been made impossible instead of merely unusually onerous. Under recent executive orders, the government deems certain industries to be “essential,”¹⁰ which will also make it more difficult to argue that contracts in such industries are impossible to perform, as the employees in such industries are exempt from stay-at-home orders.

It is key, moreover, to follow the procedures pertaining to FM specified in the contract. Many agreements may allow a party to terminate the agreement, whereas others allow for a suspension or delay in performance for the time that the FM is ongoing, and then require the resumption of performance after the conclusion of the FM. It is key to focus on the potential consequences of an FM finding with respect to your contractual relationship. Additionally, keep in mind that invoking FM may require notice to the other party within a certain time frame. If such notice is required under an agreement and is not given within the agreed time frame, the opportunity to invoke FM may pass.

Alternatives to Force Majeure

If your agreement does not include an FM provision, or FM does not apply, alternative avenues for contract renegotiation or termination may exist.

(1) Contractual mitigation. Depending on a party’s relationship with their counterparty, the party may consider proposing alternative contractual terms that are in effect only during the time that the agreement is affected by the stay-at-home order. Once the stay-at-home order is lifted, the agreement would revert to its prior terms. If a business is seeking to enter into a new agreement during the pandemic, it may consider entering into an addendum of extraordinary terms that would be in effect only during a state’s stay-at-home order. After the addendum terminates, the agreement would continue based on standard commercial terms. Given the rapidly evolving situation, parties may also want to include a provision that the addendum be reviewed every 30 days to ensure the terms are still realistic.

(2) Doctrine of impossibility. In New York, the doctrine of impossibility excuses performance only when the impossibility is due to an “unanticipated event”¹¹ and is limited to “the destruction of the means of performance by an act of God, vis major, or by law.”¹² If an agreement was negotiated after countries around the world began issuing national lockdowns in response to COVID-19, parties may be unable to argue that difficulties making performance impossible were unanticipated. However, if the agreement was negotiated prior to the COVID-19 outbreak, parties may be able to seek relief under the doctrine of impossibility. As with FM, parties will have to determine whether their agreement falls under an “essential business” exception, in which case performance of the agreement may not be “impossible,” as required under this doctrine.

(3) Doctrine of frustration. The doctrine of frustration has been interpreted narrowly in New York and applies only if the frustrated purpose was “so completely the basis of the contract” that the objectives of the contract have been utterly defeated.¹³ Frustration cannot apply merely because performance of the agreement is now more difficult or expensive for the performing party.

Conclusion

It is critical to pay attention to FM clauses and their contemplated processes and contractually mandated outcomes going forward. It is essential to ensure that FM specifically refers to epidemics, pandemics, stay-at-home orders and quarantines. Significantly, the governing law of the agreement is pivotal, as FM doctrines vary accordingly from state to state in the U.S. and in foreign jurisdictions. English law, for example, also closely examines the way an FM clause is drafted and requires that performance under the agreement be physically or legally impossible. However, in contrast to New York law, English law requires that the party take actions to avoid or mitigate the impact of the FM event, but does not require that the FM event be unforeseeable. If you believe that your agreement has an FM clause that may be triggered by the COVID-19 pandemic, or if you would like to discuss your options, Kramer Levin’s multidisciplinary COVID-19 Legal Task Force stands ready to help you navigate any legal challenges posed by COVID-19.

¹ _{Force Majeure, Cornell Law School Legal Information Institute (LII) (April 3, 2020, 11:16 AM) https://www.law.cornell.edu/wex/force_majeure.}

² _{Gen. Elec. Co. v. Metals Res. Grp. Ltd., 741 N.Y.S.2d 218, 220 (N.Y. App. Div. 2002).}

³ _{See, e.g., Kel Kim Corp. v. Cent. Mkts, 70 N.Y.2d 900, 902–03 (N.Y. 1987).}

⁴ _Id.

⁵ _{See, e.g., Avila v. Travel Dynamics, Inc., 2002 WL 31056702 (N.Y. Civ. Ct. 2002) (finding that the Sept. 11, 2001 terrorist attacks triggered an FM provision that listed “acts or threats of terrorism”).}

⁶ _{In re Cablevision Consumer Litig., 864 F. Supp. 2d 258, 264 (E.D.N.Y. 2012).}

⁷ _{Phibro Energy v. Empresa De Polimeros De Sines, 720 F. Supp. 312, 318 (S.D.N.Y. 1989).}

⁸ _{In re Cablevision Consumer Litig., 864 F. Supp. at 264.}

⁹ _{Bush v. Protravel Int’l Inc., 746 N.Y.S.2d 790, 795 (N.Y. Civ. Ct. 2002).}

¹⁰ _{Governor Cuomo Issues Guidance on Essential Services Under the “New York State on PAUSE” Executive Order, New York State Governor’s Office, March 20, 2020, https://www.governor.ny.gov/news/governor-cuomo-issues-guidance-essential-services-under-new-york-state-pause-executive-order.}

¹¹ _{Kel Kim Corp. v. Cent. Mkts., 70 N.Y.2d at 902.}

¹² _{407 E. 61st Garage v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 281 (N.Y. 1968).}

¹³ _{Crown IT Servs., Inc. v. Koval-Olsen, 782 N.Y.S.2d 708, 711 (N.Y. App. Div. 2004).}