Force Majeure Clauses and the Impossible and the Impractical
By John Delikanakis and Gil Kahn
Pandemics, although few and far between, have occurred throughout the past century. The infamous 1918 flu pandemic infected nearly 500 million individuals worldwide,1 while the far more recent H1N1 “swine flu” of 2009 resulted in an estimated 60 million cases in the United States alone.2 But no pandemic—and perhaps no event of any kind—in modern history has impacted daily life to the degree that the Coronavirus (and the resulting COVID-19) has—with nearly half of humanity currently living under some form of stay-at-home order.
The effect of this global paralysis on the economy and businesses large and small cannot yet be fully appreciated, but is undoubtedly profound. In the coming weeks and months, myriad businesses will find themselves struggling or unable to perform under contracts they executed before the pandemic’s outbreak. Seeking to prevent a breach of contract, these businesses will (or should) examine their contracts’ force majeure clauses, which, under certain conditions, excuse performance.
This legal alert examines the applicability of force majeure to pandemics, as well as the limitations of such clauses. It also reviews the related common law doctrines of impossibility and impracticability, which businesses may be able to assert in the absence of a force majeure clause.
Whether a Force Majeure Clause Covers Pandemics or Related Issues
A contract’s force majeure clause can often be found under a heading labeled with that same phrase. A typical clause may read:
Neither party shall be responsible for any resulting loss if the fulfillment of any of the terms or provisions of this agreement is delayed or prevented by any occurrence beyond a party’s reasonable control, including acts of God, fires, floods, wars, sabotage, accidents, labor disputes or shortages, governmental laws, ordinances, rules and regulations.3
An “occurrence beyond a party’s reasonable control” is the crux of force majeure—a term stemming from the Latin phrase for “superior force.”
But not all events beyond a party’s control will satisfy a force majeure clause, and the structure and wording of each clause must be carefully examined. For instance, the clause quoted above appears, upon initial reading, to excuse performance for a broad range of events—beginning with “any occurrence” and then listing diverse examples. A party to such a contract may be tempted to conclude that, somewhere between “acts of God” and “labor shortages,” a Coronavirus-related business interruption would undoubtedly be covered. However, in interpreting broad terms followed or preceded by a list of more concrete examples, courts often apply the principle that anything not explicitly listed must be “of the same kind” as the included examples. A demonstrative list may therefore work to narrow the scope of a phrase like “any occurrence beyond a party’s reasonable control.”4
A party opposing the application of a force majeure clause worded like the example above will be quick to highlight that the words “epidemic” or “pandemic” are missing from the list. In contrast, some clauses include broadly worded catch-all provisions that avoid this limiting principle—e.g., “any other cause or causes of any kind or character reasonably beyond the control of the party failing to perform, whether similar to or dissimilar from the enumerated causes.”5 The wording of each clause will vary, but the text is the starting point for assessing whether the clause applies and whether performance is thus excused.
If terms like “epidemic” or “public health restrictions” appear in the clause, then it is very likely that Coronavirus—which the World Health Organization declared a pandemic—would be considered a force majeure event. And even if such words are absent, many clauses, including the one quoted above, refer to interruptions caused by laws and regulations. Indeed, it is difficult to conceive of a more apt example of this type of interruption than the stay-at-home and business-closure orders issued in most states. But, as discussed immediately below, not all business interruptions that qualify as force majeure events will excuse performance.
The Limits of Force Majeure
There are at least two principles that commonly limit the application of a force majeure clause: if the event (1) made performance impractical and (2) was the cause of a party’s nonperformance.
Impracticability: As seen in the example above, a clause can refer to performance being obstructed or delayed, but may not provide a standard for measuring how obstructive the force majeure event must be to excuse performance. In other words, is performance objectively impossible or impractical? If neither the clause nor state law specify a standard, then courts often examine the impracticability of performance.6
Although impracticability is a somewhat more lenient standard than impossibility, it still sets a high bar. For instance, it is widely agreed that a substantial increase in the cost of performing caused by the force majeure event does not render performance impractical, even if it results in a sizeable financial loss to the business. Rather, a party must show that it would be “unjust” not to excuse performance.7 There is no bright-line rule for how much of a cost increase or a loss renders further performance unjust, but many courts have strictly construed this principle, even in light of force majeure events of national and international significance. For example:
- A federal district court in Hawaii found that, while it made “good business sense” to cancel a conference five months after the September 11 attacks due to extremely low attendance (and resulting out-of-pocket expenses), performance was not impractical;8
- The U.S. Court of Appeals for the District of Columbia held that Egypt’s closure of the Suez Canal following its nationalization did not render a cargo ship’s performance impractical, even though its alternate route added 3,000 miles and increased costs by 14 percent;9
- The Nevada Supreme Court held that increased prices for petroleum-based products resulting from the OPEC embargo did not render performance on highway contracts impractical where a contractor’s $97,000 in added expenses reflected 2.7 percent of its bid price.10
Moreover, courts in other cases have rejected impracticability defenses based on insufficient evidence of how costs are calculated and why the added expenses should be considered extreme and unjust.11
Causation: Even when a force majeure event indisputably occurs, courts examine whether the impediment to performance can be attributed to that event.12 For instance, in the September 11 case cited above, the court alternatively found that the link between the attacks and low attendance rate for the conference was too attenuated.13 Although the organizers presented evidence that the attacks severely impacted the tourism and travel industries, this evidence, the court concluded, did not demonstrate that it was “objectively inadvisable” to travel or that there was a specific threat of a terrorist attack in the host city.
These two principles demonstrate that, even if an external factor is fairly categorized as a force majeure event under the relevant contract, that event’s occurrence will not automatically excuse a party’s performance. Accordingly, businesses experiencing or anticipating performance difficulties due to Coronavirus should make detailed records regarding the degree, cost, and cause of those difficulties.
The Absence of an Applicable Force Majeure Clause
A business is not necessarily without recourse if the contract at issue lacks a force majeure clause or where that clause does not specifically reference pandemics. Such clauses are, after all, an express contractual application of the common law doctrines of impracticability and impossibility.
But businesses relying exclusively on these doctrines (rather than a force majeure clause) should be aware of at least two issues. First, some states that refer only to an impossibility defense also permit impracticability, as these terms are often used interchangeably.14 And some states, such as California, Delaware, Nevada, and Utah, explicitly recognize impracticability.15 Conversely, other states, such as New York, appear to excuse a party’s performance only if it is objectively impossible based on the unforeseen destruction of the means of performance.16 Although not clear, the courts in these states may find, for instance, that no amount of increased expense—regardless of how severe or unjust—can excuse performance.
Second, in some states, the common law doctrine of impracticability requires that the event inhibiting performance be unforeseen.17 Even in such states, however, the terms of a force majeure clause—if one exists—are what govern, and many courts will decline to include a foreseeability element if the clause does not provide for one.18 The impracticability analysis may therefore vary between a force majeure clause and the common law doctrine.
That said, as with many events that have a widespread impact on businesses, the Coronavirus will likely provide courts with the opportunity to revisit their views on force majeure clauses and impossibility and impracticability. Given the unprecedented degree of disruption that this pandemic will cause, there will likely be calls for courts to refine and ultimately liberalize these principles.