In the last few weeks, it seems every organization I have ever had contact with is telling me their COVID19 plans. While I am impressed that my mortgage company has plans to keep me safe and healthy — even though I have never spoken to nor interacted with any actual human representative of this company since my loan was sold to them nearly 10 years ago — the pandemic now seems to be developing into yet another reason for disingenuous customer outreach, rivaling even the California Consumer Privacy Act in its ability to produce unwanted email in the first month of 2020.
We technology transactions lawyers barely require human contact in the first place, so the most serious long term effect for us may be that we finally have to understand force majeure clauses. For those of you non-lawyers intrepid enough to read this post to this point, that phrase is a legal term of art roughly equivalent to an “Act of God,” and it sets rules about when parties to a contract, particularly suppliers, can breach contracts but not be held legally liable, a legal doctrine sometimes referred to as excusing performance.
Like many of the clauses in the miscellaneous section of a contract, force majeure clauses tend to go unread — or worse, become like the socks collected in the discontinuous time-space continuum of our clothes dryers — an ever-growing laundry list of items no lawyers are brave enough to remove, in case they “miss” something and are later blamed for the omission. But, like all contract clauses, force majeure clauses should be written thoughtfully, or they have the potential to backfire.
What if you say nothing?
First, chances are high that the state statute governing your contract already contains some useful rules about force majeure. That statute may not use the words force majeure at all, so it might be easy to miss. The common terms of art are frustration of purpose, impracticability and impossibility, but modern rules favor impracticability over the older impossibility doctrine. The UCC, for example, says:
§ 2-615. Excuse by Failure of Presupposed Conditions.
Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:
(a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if 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 foreign or domestic governmental regulation or order whether or not it later proves to be invalid.UCC 2-615
(b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.
(c) The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.
UCC 2-614, Substituted Performance, addresses more specifically unexpected disruptions in availability of carriers and means of payment. UCC 2-616, Procedure on Notice Claiming Excuse, describes the process of notice of the application of Section 2-615.
Impracticability, Impossibility, and Frustration of Purpose
Courts do not require that performance actually be impossible to apply the doctrine embodied in the UCC, merely that it be commercially impracticable, such as due to excessive cost. But the doctrine has its limits. For example, in Watson Labs. v. Rhone-Poulenc, Inc., 178 F. Supp. 2d 1099 (C.D. Cal. 2001), plaintiff Watson sought relief for breach of a pharmaceutical supply agreement. The supplier in the contract, an RPR affiliate, operated a manufacturing plant for the pharmaceutical product in question. At the time the agreement was signed, the plant was already operating under an FDA consent decree, resulting from “violation of numerous… Good Manufacturing Practices” established by FDA regulations, and providing that the FDA could shut down manufacturing in the event of future violations. After the plant was actually shut down and the supply disrupted, the buyer sued for breach of contract and seller invoked the force majeure clause, but the court did not excuse defendants’ failure to perform because the shutdown was foreseeable, and within the defendant’s reasonable control. The court probably gave weight to the fact that the contract was expressly intended to meet all of the plaintiff’s requirements for the drug, and that both parties knew there was no other approved supplier.
Frustration of purpose happens when the supplier is willing to perform, but one of the contract’s basic premises fails. This is sometimes referred to as creating an implied condition to performance. If you are a lawyer, you probably remember from law school the old coronation cases such as Krell v. Henry, 2 K.B. 740 (1903), in which a man rented a room temporarily to watch the coronation parade of King Edward VII. The coronation was rescheduled due to the King’s appendicitis, so the purpose of the contract was frustrated, and the renter was excused from renting the room. Notably, the application of this doctrine resulted in excuse for the buyer, not the seller.
In sum, these doctrines are meant to handle the unexpected — facts that the parties could not have reasonably foreseen when they entered into the contract. They are intended to be general in nature, so they are flexible enough to handle circumstances that are difficult for parties to predict.
Drafting Specific Force Majeure Clauses
One might be tempted this month to change all the contract forms in existence to include “pandemic,” and consider the matter handled, but that’s probably not the right long-term approach. The endlessly-growing-laundry-list is doomed to failure, because it pits the lawyer’s imagination for catastrophe against that of reality, and in that respect, reality always wins. Despite the famously pessimistic imagination of of most lawyers, none of us knows what the next crisis will be. So, think hard about what you write, particularly if you are a seller, because you may be foregoing some of the automatic relief from performance the statute would otherwise provide.
But force majeure clauses don’t merely define what events make performance excusable; they can be used to set the details of what happens when performance is excused. For example, they can outline a specific process for notice of shipment delays, set preferences for allocation of orders among customers in the case of shortage, or set the process to cancel an order or contract if the event persists. These specific remedies and procedures need to be based on the facts of the deal.
Force majeure clauses can also seek to expand the application of the doctrine to specific contingencies, unexpected changes in the cost of the inputs of goods, which may be not captured by background doctrines of impracticability. For example, in the early 2000s, “worldwide semiconductor shortages” were a popular addition to the laundry list, due to a phenomenon that Wikipedia charmingly calls “chip famine.” Otherwise, “[e]conomic events, such as failures of markets, are very difficult to assert as events of force majeure…” ( J. Kelley, “So What’s Your Excuse? An Analysis of Force Majeure Claims,” 2 Texas Journal of Oil, Gas, and Energy Law 91 , 110 (2006).)
If you want to guide a court’s finding of frustration of purpose, you can draft wisely to that effect as well. The purpose of a contract is often set out in its recitals — yet another reason to write them correctly and specifically for the deal.
Does Force Majeure Cover COVID19 Disruptions?
Of course, that’s a trick question because it can’t be answered generally, only with reference to specific facts. The existence of a virus standing alone would not trigger a force majeure clause, but resulting actions or developments could be considered force majeure. For example:
- Travel restrictions imposed by government or suggested by health authorities
- Embargoes, export or import restrictions
- Broad failure of supply chains
- Closure of public buildings or cancellation of events
- Shortages of products due to hoarding
- Shortages of medical services or supplies due to pandemic conditions
Courts will generally tend to interpret express force majeure clauses narrowly, and will not excuse performance merely because the of potential existence of a performance problem, or a performance problem with simultaneous causes other than force majeure. General economic downturns that make performance unprofitable do not generally qualify — that’s a risk of doing business. The court will look for a specific external cause that could not be reasonably avoided. For an example of a detailed test used by one federal court, see Transatlantic Fin. Corp. v. United States, 363 F.2d 312, 315 (D.C. Cir. 1966), a case involving the 1956 nationalization of the Suez Canal.
As with everything in life, the practical steps to addressing force majeure due to the COVID19 pandemic in Q1 2020 are less exciting than reading overwrought news headlines about it. If contracting parties today have concerns about invoking force majeure clauses, those concerns need to be analyzed on a case-by-case basis. The relevant law is state law, so one can’t merely rely on the UCC, even though most state statutes roughly follow it; one must check relevant state cases for more detailed rules. Here are a few citations to relevant statutes for the most common jurisdictions, for a starting point. To find the relevant case law, it’s helpful to turn to an annotated version of the statute, or look for cases that cite the statute.
Keep Calm and Wash Your Hands
As for the rest of it, now is the time to be grateful for whatever free time you have recaptured from cancellation of your doubtless excessive professional commitments, and to do your taxes, plant a victory garden, use up those groceries in your freezer, and watch the new episodes of Better Call Saul. And wash those hands.