As the COVID-19 pandemic grows, our daily lives, and business operations, continue to be interrupted in ways that we have not seen in recent memory. Major sport leagues have been suspended, local events postponed, deliveries cancelled, and other contractors have failed to perform their contracts due to the viral outbreak. However, when an event is canceled or a contract is broken due to a global pandemic, who should bear the cost? Often, this answer can be found in a contract’s force majeure clause.
What is a Force Majeure Clause?
A “Force Majeure” Clause is a contractual provision that is commonly used to allocate risk of loss if performance under a contract becomes impossible or impracticable. However, the term force majeure itself, as one court described it, is “little more than a descriptive phrase without much inherent substance.” Accordingly, any interpretation of a force majeure clause will rely heavily on the contract language itself. A court interpreting a force majeure clause will look to see if the parties intended the clause to excuse (or delay) nonperformance due to a pandemic or similar event. The court will also look to see if the parties specify how damages should be allocated in the event of force majeure.
Typically, a force majeure clause will (but not always) include a list of events that excuse nonperformance under the contract or delay contract performance. These events are negotiated by the parties entering into the contract and may include events such as: “Acts of God,” floods, hurricanes, war, and labor disputes. Following the recent outbreaks of SARS, swine flu, the zika virus, and others, some force majeure clauses now include specific references to a “pandemic”, “epidemic”, “contagious disease” or other similar language. Additionally, many force majeure clauses will include a “catch-all” provision such as “any other reason not within the reasonable control of the nonperforming party.”
To successfully invoke a force majeure clause, the occurrence of these events must not occur due to the nonperforming party’s fault or negligence. Further, the triggering event generally (but not always) must be unforeseeable. If a specific event is not defined in the clause and is foreseeable, then the catch-all provision will generally not apply.
When invoking a force majeure clause, the burden of proof rests with the nonperforming party and, the nonperforming party must show what action it took to perform the contract regardless of the occurrence of the unforeseen event.
How Have the Court’s Interpreted Force Majeure Clauses in Relation to Pandemics?
There are very few United States cases discussing the interplay between an epidemic or pandemic and the performance of a contract. Two cases from the 19th century decided under common law provide some guidance:
In Lakeman v. Pollard, 43 Me. 463 (1857), a laborer at a mill during a cholera epidemic left his job early due to concerns of contracting the disease. Consequently, he failed to complete his work contract. Testimony was provided that, while there was a cholera outbreak nearby, workers at the mill were healthy at the time the laborer departed and remained healthy after he left. The Maine Supreme Court under common law determined that the cholera outbreak was an “Act of God” and the laborer’s duty to perform under the contract was discharged. The Court concluded:
The plaintiff was under no obligation to imperil his life by remaining at work in the vicinity of a prevailing epidemic so dangerous in its character that a man of ordinary care and prudence, in the exercise of those qualities, would have been justified in leaving by reason of it, nor does it make any difference that the men who remained there at work after the plaintiff left were healthy, and continued to be so. He could not then have had any certain knowledge of the extent of his danger. He might have been in imminent peril, or he might have been influenced by unreasonable apprehensions. He must, necessarily, have acted at his peril, under the guidance of his judgment.
Similarly, in Coombs v. Nolan, 6 F.Cas. 468, 468 (S.D.N.Y. 1874), the District Court for the Southern District of New York excused a delay in the discharge of cargo where the defendant could not obtain enough horses to timely unload a ship. At that time, an epidemic prevailed amongst horses which prevented their procurement at any price. The Court determined that the delay was caused by the epidemic which was an Act of God thus rendering performance impossible by a cause which the defendant had no control.
More recently in Rexing Quality Eggs v. Rembrandt Enterprises, Inc., 360 F. Supp. 3d 817, 841 (S.D. Ind. 2018), the Southern District of Indiana, while not deciding the issue, suggested that a drop in the supply of eggs due to the avian flu may be an act outside of the reasonable control of a party under a force majeure clause. The clause at issue included a catch-all provision which excused performance due to acts or events beyond the reasonable control of the parties. The Court noted that “the avian flu…may plausibly constitute an unforeseeable event precipitating a dramatic change in market conditions.”
Analyzing a Force Majeure Clause
Since the courts have provided little guidance on whether an outbreak of a disease will generally qualify as a force majeure event, any analysis will largely depend on the language of the contract itself.
The first step in determining if a force majeure clause can be invoked is to review the force majeure language. If the language contains references to a “pandemic,” “epidemic,” “contagious disease,” or other similar language, a party can likely invoke the force majeure provision if the nonperformance was caused by the pandemic, and not by some other non-qualifying reason.
If the contract does not contain reference to “pandemic”, “epidemic”, “contagious disease”, or other similar language, there remains a possibility that the force majeure clause could be invoked under a force majeure provision which includes reference to: 1) an Act of God; 2) a general “catch-all” provision; and 3) or other applicable provisions.
Whether a pandemic is an Act of God will depend on each individual state’s definition of an Act of God. For instance, the Pennsylvania Supreme Court has previously defined an Act of God as “an unusual, extraordinary, sudden, and unexpected manifestation of the forces of nature which cannot be prevented by human care, skill or foresight.” Further, the Act of God must result from natural causes and cannot result from human action. Under this definition, a reasonable argument can be made that the COVID-19 pandemic is a sudden manifestation of the forces of nature that cannot be prevented by human care, skill, or foresight. Even with the world governments taking extraordinary precautions, the pandemic persists. Conversely, an argument could be made that the spread of the disease is caused by human agency (i.e., human-to-human contact), and thus, is not an entirely natural event.
If the pandemic does not qualify as an Act of God, the pandemic may still qualify under a “catch-all” provision, which excuses performance due to acts or events beyond the reasonable control of the parties. Even if the pandemic qualifies, a catchall provision does not apply to foreseeable events. With the somewhat recent outbreaks of SARS, Swine Flu, Zika, and others, a reasonable argument could also be made that the pandemic was foreseeable, and, therefore, should have been addressed in the contract. However, as we have not had a pandemic to the current extent in our lifetime, a court could certainly find that this was not a foreseeable event.
In addition, there may be grounds to invoke a force majeure clause under other defined terms in the specific provision. For instance, many contracts include terms such as “emergency,” “government action,” and “regulation or rule.” These terms will need to be analyzed on a case-by-case basis and may also depend on when the event was cancelled and why it was cancelled in relation to the “emergency,” “government action”, or “regulation or rule”. In addition, other bodies of law, such as the Uniform Commercial Code, may also be relevant.
Finally, it should also be noted that there may be public policy reasons why a court might broadly construe the application of a force majeure clause in the context of the COVID-19 pandemic such as: (i) virtually every business has been interrupted in some way due to the virus, a failure to enforce these clauses would result in a significant liability pool; and (ii) courts may not want to disincentivize parties from taking actions that they believe to be in the interest of public health.
If you would like assistance interpreting a contract or understanding if the force majeure clause is applicable to your business operations, our attorney team is here to help. Please contact us using the form below, or give us a call at 610-797-9000. We wish you well during these extraordinary times.