Contracts and Pandemics: Applicability of Force Majeure Clauses

Authored by:  Alexander I. Passo & Rachel Miller

Those who draft, negotiate, and litigate contracts often see the standard but rarely – if ever – invoked force majeure clause.  French for “superior force,” force majeure is a legal term of art for exceptional circumstances that prevent a party from performing their obligations under a contract.

These circumstances generally include acts of nature, such as hurricanes, tornadoes, earthquakes, flood, and other Acts of God. They also include Acts of Man, including war, famine, and riots. A standard clause in most contracts, force majeure either eliminates or diminishes a party’s liability for a failure to perform due to an event considered force majeure. The event must have been unforeseeable at the time of entering into the contract and be so extreme that performance would be impossible or the failure to excuse performance would result in a grave injustice.

The doctrine, based on the legal theory that one cannot be liable for unforeseeable acts beyond their control, is set forth in Section 2-615 of the Uniform Commercial Code. It excuses performance under a contract where “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.”

Under Section 2-615, force majeure only applies if three conditions are met:

(1) the emergency occurred;

(2) the emergency made performance of the contract impossible; and

(3) the emergency was that of one which was unexpected when the contract was formed.

Citgo Petroleum Corp. v. Ranger Enters., 573 F. Supp. 2d 1114 (W.D. Wis. 2008).

Pandemics

Parties to term-based performance contracts are operating under a great deal of stress and uncertainty because of the COVID-19 pandemic. A frequent question asked by such parties is whether a delay of performance due to the pandemic will result in a material breach of contract. While the force majeure doctrine may relieve a party of liability for delayed performance, whether it will apply in a given case is not always clear.

Courts disfavor the defense in contracts which relate to the supply and demand of utility resources, and government orders related to the fluctuations, because the parties should be prepared for such fluctuations. See N. Ill. Gas Co, v. E. Cooperative, Inc., 122 Ill. App. 3d 940 (3d Dist. 1984). Conversely, the use of force majeure in general sales and performance-based contracts has been more successful. In one case, Rod Stewart was excused from his performance obligations due to falling ill under a force majeure clause. See Rio Props. V. Armstrong Hirsch Jackoway Tyerman & Wertheimer, 94 Fed. Appx. 519 (9th Cir. 2004); see also, Parker v. Arthur Murray, Inc., 10 Ill. App. 3d 1000 (Ill. 1973) (contract was rescinded under doctrine of impossibility of performance).

There is scant case law pertaining to pandemics and their effect on performance, and the little that does suggest that pandemics could be considered a foreseeable event and thus insufficient to discharge the duty to perform under a contract. In Phelps v. Sch. Dist., 302 Ill. 193 (Ill. 1922), the court found that a school closure due to influenza in the wake of World War I did not constitute an Act of God rendering performance impossible, where the performance at issue was a school’s payment of salary to a teacher who was willing to work.

Subsequent cases have held that closure of schools and other facilities due to pandemics and epidemics were not Acts of God, and that a closure for any reason would be foreseen and thus could not be used as an excuse to discharge performance. These cases distinguish the illness itself from the act by man in response to the illness. While the illness may constitute an Act of God, courts individually analyze the acts taken by people in response to determine whether they were unforeseeable and fall under the force majeure clause. If the illness alone makes performance impractical or impossible, that may be sufficient to sustain non-performance based on force majeure.

In the event the COVID-19 pandemic triggers force majeure clauses, the party seeking to invoke the clause will still need to demonstrate that they attempted to mitigate their damages and that their performance under the contract was actually impossible.

For example, if a supplier has other manufacturing facilities that are not impacted by the event, they would have a duty to use the alternative manufacturing facility to meet their obligations. Additionally, all parties must show that the event was unforeseeable for the defense to apply. While a school closing due to health reasons is foreseeable and generally not sufficient to excuse performance, the inability to gather a large group of people together during a pandemic to prevent injury to the public is generally unforeseeable and excusable under force majeure.

As one court stated in response to the 1918 influenza epidemic which killed approximately 50 million people, “[t]he court will not require the performance, or award damages for a breach, of a contract in which the public have so great an interest as the preservation of health, if the health is in fact endangered, any more than it would require one to be performed the tendency of which was immoral or one which interfered with the right of everyone to earn a livelihood by a lawful occupation.” Hanford v. Conn. Fair Ass’n, 92 Conn. 621, 624 (Conn. 1918). Consequently, Hanford, suggests that courts may excuse non-performance directly caused by a pandemic for public policy reasons.

Frustration of Purpose and Impossibility of Performance

In the event a contract does not contain a force majeure clause, unforeseeable events may nevertheless excuse a party from performance under the common law doctrines of frustration of purpose and impossibility of performance.

A party may raise as a defense that performance under the contract was frustrated where it is still possible to perform under the contract, but an unforeseen condition intervened and destroyed the expected value the non-performing party would expect to gain. Leonard v Autocar Sales & Service Co., 392 Ill. 182 (Ill. 1945).

Frustration of purpose is an outgrowth of the doctrine of impossibility of performance. Impossibility recognizes that the continued existence of a person, thing, or condition is so essential to performance of the contract that the person’s death, the thing’s destruction, or other change in circumstance makes one party’s performance impossible or substantially more difficult than anticipated. Id. This assumes that the parties contracted on the basis that the condition at the time they entered into the contract would continue. If, for example, a party agreed to pay another party $500,000.00 for a warehouse, but a fire destroys the warehouse   before the transaction could take place, performance of the contract is impossible.

Both of these defenses to breach of contract claims following a force majeure event rest on the presumption that contractual obligations are not absolute but are premised on certain conditions that, when changed, destroy the foundation on which the contract is based. In terms of determining contractual duties in light of the COVID-19 pandemic,, he assumptions which led to the agreement must be as carefully examined as the contract itself.

Conclusion

The COVID-19 pandemic is unprecedented in modern times. There has not been a pandemic in America since Spanish Influenza in 1918. What case law there is on epidemics and their impact on contractual obligations relate to that episode, and thus are almost a century old. Ultimately, there is no question that the COVID-19 pandemic is going to strain parties’ abilities to meet their obligations under performance-based contracts. Litigation arising from breaches will likely be cases of first impression as to whether force majeure will apply for excuses of performance. At this point in time, it would be prudent to proactively review current contracts to determine the scope and notice requirements of any force majeure clause.

About the Author:

Headshot.croppedAlex is a commercial trial attorney with the law firm of Latimer LeVay Fyock LLC.  Alex has lead counsel experience on a broad array of disputes, including closely-held shareholder/member disputes, breaches of contract, fraud, TROs and injunctions, and professional negligence actions.  Alex also serves as outside general counsel for several startup and mid-market companies providing them legal counsel when issues arise.

Rachel  is a third-year law student studying at Loyola University School of Law and a law clerk at Latimer LeVay Fyock LLC. She has experience in civil litigation and criminal prosecution including disputes involving intellectual property, breach of contract, commercial transactions, immigration, civil rights and appellate practice. She also works in commercial transactions.

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