Performance of Contracts During the Coronavirus Outbreak: Force Majeure and Impracticability

March 17, 2020

On March 11, 2020, the World Health Organization declared COVID-19 a pandemic.[1] Internationally, precautions taken to prevent the spread of COVID-19 have had a negative impact on trade due, in part, to the delayed manufacturing and transportation of goods. It is eminently clear that COVID-19 has already made an impact on local, national, and international economies. With an incubation period ranging from one to fourteen days, it is difficult to determine the true scale of COVID-19 infections.[2] As such, the issue has been raised as to how the inability to perform under a contract, due to COVID-19 related precautions, would be analyzed where a force majeure clause exists and where one does not.

According to the Third Circuit, “a force majeure clause in a non-warranty contract defines the area of unforeseeable events that might excuse nonperformance within the contract period.”[3] The party claiming excusal has the burden of proof.[4] To excuse nonperformance, the event must have been beyond the party’s control and without its fault or negligence.[5] Generally, also as part of this burden, the nonperforming party must show what action it took to perform the contract regardless of the occurrence of the event.[6] However, the specific application and effect of a force majeure provision will depend on its language.[7]

A force majeure provision should contain four elements: (1) an enumeration of “triggering events,” along with a catch-all provision; (2) the required effect of a triggering event on performance; (3) the effect of the provision on other contractual obligations, and (4) a notice procedure.[8] Where any of these elements are left out or ambiguous, the provision should be interpreted with regard to the whole contract, “giving effect to each clause when practical.” [9]

Historically, a force majeure event, or a triggering event under a force majeure clause, was equated to an “act of God,” an “overpowering, superior, or irresistible force.”[10] However, force majeure provisions may be drafted to include a broader set of circumstances beyond the control of the party, such as sudden illness, war, or governmental interference.[11] This expansion in the realm of triggering events represents a straying from the concept that performance under a force majeure clause must be made impossible by the triggering event to the idea that performance could be made merely impractical by the triggering event.[12] At least in Pennsylvania, the two doctrines appear to have merged.[13] Therefore, impracticability will likely be the standard, unless the language of the provision indicates otherwise.

Where no force majeure provision exists, the doctrine of impracticability may be used as a defense to a claim of breach of contract for nonperformance after the occurrence of a major event.  A court may find impracticability when performance under the contract can only be carried-out at an excessive, unreasonable, and unbargained-for cost.[14] The considerations undertaken when analyzing a defense of impracticability largely mirror the elements of a force majeure clause. Impracticability requires: an event; nonoccurrence of the event must be a basic assumption of the contract; and that the party asserting the defense cannot be at fault for the occurrence of the event.[15]

In relation to the coronavirus outbreak, these legal concepts will only come into play upon the occurrence of a triggering event. It is unlikely that prophylactic measures taken on a voluntary basis will excuse performance. For example, in New York, officials have placed an indefinite ban on most gatherings of more than 500 people.[16] This sort of government interference with the performance of a contract concerning an event of more than 500 people may excuse performance under that contract.

However, preemptively canceling an event on the absence of such government interference may not amount to a triggering event without more evidence that fear or actual danger of the disease would render performance “impracticable.” This has to do, in part, with the fact that both a force majeure clause and the doctrine of impartibility rely on a triggering event being beyond the control of the nonperforming party.  Further, inherent to the burden of the nonperforming party is that it must show what action it took to perform the contract regardless of the occurrence of the event.[17] This would not be an issue for a force majeure clause that contemplates illness or public health crises.

If you have a question about this or any business matter, please contact Alexis Wheeler of Strassburger McKenna Gutnick & Gefsky at awheeler@smgglaw.com or (412) 281-5423.

 

 

[1] World Health Organization, Media briefing on #COVID19 with @DrTedros #coronavirus (March 11, 2020), https://www.pscp.tv/w/1djxXQkqApVKZ.

[2] See World Health Organization, Report of the WHO-China Joint Mission on Coronavirus Disease 2019 (COVID-19), at 12, https://www.who.int/docs/default-source/coronaviruse/who-china-joint-mission-on-covid-19-final-report.pdf (last visited March. 17, 2020).

[3] Gulf Oil Corp. v. F.E.R.C., 706 F.2d 444, 452 (3rd. Cir. 1983)(citing United States v. Brooks-Callaway Co., 318 U.S. 120 (1943)).

[4] Id.

[5] Id.

[6] Id. at 452.

[7] 77A C.J.S. Sales § 370; 30 Williston on Contracts § 77:31 (4th ed.); Rohm & Haas Co. v. Crompton Corp., 2002 WL 1023435, *3 (Pa. Ct. Com. Pl. Phila. Cnty. 2002).

[8] 2 Thomas D. Selz et al., Legal Concepts and Business Practices Entm’t Law 3d, § 9:61 (2019 ed.).

[9] Jennifer M. Bund, Force majeure Clauses: Drafting Advice for the CISG Practitioner, 17 J.L. & Com. 381, Spring 1998, at 410; Sabine Corp. v. ONG Western Inc., 725 F. Supp. 1157, 1166 (W.D. Okla. 1989).

[10] P.J.M. Declercq, Modern  Analysis of the Legal Effect of Force Majeure Clauses in Situations of Commercial Impracticability, 15 J.L. & Com. 213., Fall 1995, at 233.

[11] Id; 30 Williston on Contracts § 77:31 (4th ed.)(citing ARIPPA v. Pennsylvania Public Utility Com’n, 792 A.2d 636, 666 (Pa. Commw. Ct. 2002).

[12] Declercq, supra note 10.

[13] West v. Peoples First Nat. Bank & Trust Co., 106 A.2d 427, 432 (Pa. 1954);  Davis–Haas v. Exeter Township Zoning Hearing Board, 166 A.3d 527, 540 (Pa. Commw. Ct. 2017).

[14] 30 Williston on Contracts § 77:31 (4th ed.).

[15] Selz, supra note 8, at §9:139.30.

[16] GOVERNOR ANDREW M. CUOMO, During Novel Coronavirus Briefing, Governor Cuomo Announces New Mass Gatherings Regulations (March 12, 2020) https://www.governor.ny.gov/news/during-novel-coronavirus-briefing-governor-cuomo-announces-new-mass-gatherings-regulations.

[17] Gulf Oil Corp. v. F.E.R.C., 706 F.2d 444, 452 (3rd. 1983)(citing United States v. Brooks-Callaway Co., 318 U.S. 120 (1943)).