October 22, 2020

Volume X, Number 296

Advertisement

October 21, 2020

Subscribe to Latest Legal News and Analysis

October 20, 2020

Subscribe to Latest Legal News and Analysis

October 19, 2020

Subscribe to Latest Legal News and Analysis

Force Majeure Clauses and COVID-19 – Can Force Majeure Clauses Excuse Performance Under New York or Delaware Law in a Pandemic?

With the World Health Organization declaring COVID-19 a pandemic on Wednesday, March 11, 2020, businesses are likely to continue to feel its effects.  When businesses are unable to perform their contractual obligations as a result of COVID-19, force majeure clauses may become important.

Force majeure clauses are commonplace in various contracts, including supply contracts, loan agreements, leases, and construction contracts.  However, they may not be included in all contracts.  For example, a recent study, performed by Kira, of 130 commercial contracts involving Chinese entities found that only 72% contained force majeure clauses.[1]

Force majeure clauses often excuse or defer performance under New York and Delaware law in the event of circumstances beyond the parties’ control, such as fire, flood, war, or acts of God.  Because the scope of a force majeure clause depends on its express terms, there is no uniform rule as to when a force majeure clause excuses performance – it’s all in the details.

What Language in a Force Majeure Clause Excuses a Party’s Performance in a Pandemic?

Force majeure clauses often include lists of events, the occurrence of which will excuse or delay a party’s performance.  Under New York law these clauses must be narrowly construed, meaning that only events specifically listed will excuse a party’s performance.[2]  Similarly, under Delaware law, force majeure provisions are interpreted according to their plain meaning.[3]  A force majeure clause could cover the COVID-19 pandemic if it includes specific public health-related language, such as “flu, epidemic, serious illness or plagues, disease, emergency or outbreak.”[4]  Kira found that only 14% of contracts included this specific language.[5]  Such an interpretation is particularly applicable to situations where such illness related events reach the level of a pandemic that impacts the performance under the contract, e.g., when non-essential factories are uniformly closed, especially when such closures are directed by governmental authorities as is currently the case in Italy.

“Acts of government” may also constitute force majeure events.  San Francisco Mayor London Breed issued an order on March 11 prohibiting both indoor and outdoor gatherings of 1,000 or more people, causing a slew of cancellations, including San Francisco Symphony and Ballet performances and conferences at the Moscone Center.  Washington State, which had 375 confirmed cases and 31 deaths as of March 11, instituted a similar ban on gatherings of 250 or more people.  Kira found that 44% of contracts included this language.[6]

Force majeure clauses may also contain “catch-all language,” such as “or other similar causes beyond the control of such party”[7] or “for any reason.”[8]  Under New York law, such catch‑all phrases are construed pursuant to the doctrine of ejusdem generis, meaning that only events like those specifically mentioned are included in the force majeure provision.[9]  For example, in Team Mktg. USA Corp., 838 N.Y.S. 2d at 246, the court held that the catch-all phrase “for any reason” did not include a third-party’s rescheduling and cancelling of events because the clause only enumerated “strikes, boycotts, Acts of God, labor troubles, riots, and restraints on public authority.”  However, parties can agree to specific catch-all language, such as “any cause whether similar or dissimilar to the foregoing,” that broadens the scope of the force majeure provision.[10]  In Castor Petroleum Ltd. v. Petroterminal De Panama, S.A., 968 N.Y.S. 2d 435, 498 (1st 2013), the court held that the attachment of plaintiff’s oil due to lawsuits fell within the contract’s “relatively broad” catch-all provision—“or other similar or dissimilar event or circumstances”—and relieved defendant of its obligations.  The force majeure provision only enumerated “government embargo or other interventions.”[11]

Under Delaware law, the parties can broaden force majeure clauses through specific language.  For example, in Stroud, 2004 WL 1087373, at *5, the court held that the force majeure clause, which included the catch-all phrase “any reason whatsoever beyond the control of [defendant],”[12] included “delays” even though only “fire, strikes, and acts God” were listed.  However, the court held that these delays did not excuse defendant’s performance because they were foreseeable.[13]

Kira found that 82% of contracts included either catch-all language or specifically enumerated public health-related language or both.  But this statistic is deceptive because not all catch-all language relieves a party’s performance due to COVID-19.  If a contract contains a catch‑all clause, such as “or other similar causes,” but does not enumerate any similar events to a pandemic or act of government, then the force majeure clause would not cover COVID-19.  On the other hand, if a contract contained a broad catch-all phrase, such as, “all events whether similar or dissimilar,” then the force majeure provision could cover COVID-19.

What if Your Contract Does Not Contain a Force Majeure Clause or the Clause Does Not Cover COVID-19?

The contractual defense of impossibility is still available; however, impossibility is a limited defense to nonperformance of a contract.  Under New York law, the defense of impossibility is only available when “the destruction of the means of performance by an act of God” makes performance of the contract objectively impossible.[14]  Put another way, performance must be made impossible by “an unanticipated event that could not have been foreseen or guarded against in the contract.”[15]

Moreover, under Delaware law, a party’s performance must be “rendered impossible by an act of God, law or the other party,” and the party must demonstrate that the contract cannot be performed “by any means.”[16]  The doctrine of commercial frustration is also available under Delaware law, but it is extremely difficult to invoke.[17]  A party’s main purpose must be completely, or nearly completely, frustrated, and the supervening event cannot have been reasonably foreseeable or anticipated at the time of contracting.[18]

While COVID-19 may constitute an unanticipated and unforeseen event, impossibility only applies if the contract is truly impossible to perform.  A party’s performance is not excused if the contract is simply more financially difficult to perform, even to the extent of insolvency or bankruptcy.[19]  Likewise, cancellations and disruptions in supply chains may not be the type of “cataclysmic events” that render a contract entirely “valueless” for commercial frustration to apply.[20]


FOOTNOTES

[1] Jennifer Tsai, Force Majeure Provisions in Chinese Contracts, Kira, 2-3 (February 2020), https://kirasystems.com/files/guides-studies/KiraSystems-Deal_Points_Force_Majeure_Coronavirus.pdf.
[2] Reade v. Stoneybrook Realty, LLC, 882 N.Y.S. 2d 8, 9 (1st Dep’t 2009). Z[3] Stroud v. Forest Gate Dev. Corp., No. Civ.A 20063-NC, Civ.A 2064-NC, 2004 WL 1087373, at *4 (Del. Ch. May 5, 2004) (“Application of a force majeure provision, as with any other contractual provision, starts with the words chosen by the drafters[.]”)
[4] Tsai, supra note 1, at 4.
[5] Id.
[6] Id. at 6.
[7] Kel Kim Corp. v. Cent. Mkts., 70 N.Y. 2d 900, 903 (1987).
[8] Team Mktg.USA Corp. v. Power Pact LLC, 839 N.Y.S. 2d 242, 246 (3d Dep’t 2007).
[9] Id.
[10] Constellation Energy Servs. of N.Y., Inc. v. New Water St. Corp., 46 N.Y.S. 3d 25, 146 A.D. 3d 557, 558 (1st Dep’t 2017) (“[W]hen the parties themselves define[] the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.” (citation omitted)).
[11] Castor Petroleum, 968 N.Y.S. 2d at 498.
[12] Stroud, 2004 WL 1087373, at *5 (emphasis added).
[13] Id. at *7.
[14] Kolodin v. Valenti, 979 N.Y.S. 2d 587, 589 (1st Dep’t 2014).
[15] Kel Kim Corp., 70 N.Y. 2d at 902.
[16] Bell Atlantic Dir. Servs., Inc. v. Del. Law Ctr., Inc., No. CRIM.A.1997-07-083, 2000 WL 33654061, at *1 (Del. C.P. Dec. 14, 2000).
[17] Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 872 A.2d 611, 620 (Del. Ch. 2005).
[18] Id.
[19] Rivas Paniagua, Inc. v. World Airways, Inc., 673 F. Supp. 708, 713 (S.D.N.Y. 1987) (quoting 407 E. 61st Garage v. Savoy Fifth Ave., 23 N.Y. 2d 275, 275 (1968)).
[20] See Wal Mart Stores, Inc., 872 A.2d at 620 n.35, 621.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume X, Number 73
Advertisement

TRENDING LEGAL ANALYSIS

Advertisement
Advertisement

About this Author

Edward Tillinghast Finance Lawyer Sheppard Mullin
Partner

Edward Tillinghast is a partner and Practice Group Leader of the firm's Finance and Bankruptcy Practice Group. He specializes in U.S. and cross-border insolvencies, particularly involving Asia and other emerging and developing markets, and related creditors' rights litigation.

Areas of Practice

Edward specializes in corporate reorganizations, cross-border insolvencies, creditors’ rights and related litigation, distressed acquisitions and insolvency-related opinions. He advises clients in many jurisdictions throughout Asia, Australia, Europe, Russia, South...

212.634.3050
Jacqueline Simonovich
Associate

Jacqueline M. Simonovich is an associate in the Business Trial Practice Group and a member of the firm’s International Arbitration Team in the firm's San Francisco office.

Areas of Practice

Jacqueline’s practice focuses on international commercial arbitration and complex civil litigation. She has litigated matters before international arbitration forums, including the ICDR and the ICC.

During law school, Jacqueline served as a publishing editor for the Berkeley Journal of International Law. She also participated in Berkeley Law’s Death Penalty Clinic and wrote major portions of a Motion to Preclude Death Qualification, a practice that unfairly biases jurors against the defendant.

415.774.2974
Advertisement
Advertisement