Published in NH Bar News (12/16/2020)
Whether your client is a hair dresser, builds skyscrapers, owns a concert venue, or is an NFL star sitting out this year’s season, COVID-19 has impacted countless businesses and professionals in fulfilling their contracts. At the onset of COVID-19, business lawyers across the nation scrambled to write blogs and present Zoom seminars on how courts might approach the nonperformance of contracts during COVID-19. Since then, corporate attorneys have been revamping boilerplate force majeure clauses for struggling industries to address unsure deliverables during unpredictable times.
By now, most clients understand that many contracts have clauses that excuse performance where events occur that are beyond the control of the parties. These force majeure clauses vary among industries. The clauses excuse performance either wholly or for the duration of the force majeure event. Some clauses limit damages and some allow for early termination when a force majeure event occurs. Typical clauses contain easily-defined terms, such as floods or hurricanes, and more cryptic terms, such as “acts of God,” “disruption of the labor force,” “shortages of labor or materials,” and “government laws.” The most expansive clauses include catch-all phrases such as “circumstances beyond the control of the parties,” which terms are construed narrowly by the courts. Because force majeure is a creature of contract, it is different than the common law excuse doctrines of impossibility of performance and commercial impracticability.
Certain trends are developing in force majeure litigation during COVID-19. A few lessons can be gleaned from the developing jurisprudence over the past eight months.
Concurrent Force Majeure Events
What is the COVID-19 force majeure event? This pandemic has undefined boundaries and time limits which distinguish it from other force majeure events, such as a natural disaster or a work strike. It can be argued that COVID-19 appears in many forms - as a relentless virus and disease, a global financial crisis, a series of on again/off again government restrictions on business operations and non-essential activities, disparate local and international travel restrictions, and abrupt, unexpected changes in human behavior. The far-reaching effects of COVID-19 complicate the factual inquiry into what events or factors have caused deficiencies in performance or justify early contract termination because of the pandemic.
Since the causes of nonperformance in the era of COVID-19 may be elusive or multi-factored, litigants invoking force majeure are pleading multiple force majeure events in the alternative. For example, in the air fare credit card litigation between Santander and American Airlines, the bank pled alternatively that its early contract termination under a force majeure clause was justified because the cessation of air travel between the United States and Brazil was caused by (a) the pandemic; (b) resulting government-imposed restrictions; and (c) unprecedented decline in demand for air travel, with each event independently excusing performance under the contract’s force majeure clause. See Banco Santander (Brasil), S.A. v. American Airlines, No. 20-cv-3098 (E.D.N.Y 2020).
Although legal commentary has fixated on the narrow question of whether COVID-19 will fit within the terminology of boilerplate force majeure clauses, courts seem less focused on that threshold question. Rather, many courts have bypassed the threshold question entirely and instead have focused directly on whether the pandemic is the cause of the alleged nonperformance or delayed performance, assuming without deciding that the pandemic falls within the scope of the force majeure clause. See e.g., Future Street Ltd. v. Big Belly Solar, LLC, 2020 WL 4431764 (D. Mass. July 31, 2020)(“Even assuming arguendo that the pandemic and effects of same are a force majeure under the Agreement, [plaintiff] has not shown that its failure to perform its obligations under the Agreement were caused by same. . .”).
Where nonperformance can be attributed to some events that might qualify as a force majeure event, and others that do not, complicated causation issues are presented. Typically, the force majeure event does not need to be the sole cause impacting performance, so long as the defect in performance would not have occurred but for the force majeure event. As the pandemic lingers on, causation issues will be litigated with greater frequency, and courts will consider more cases where parties raise multiple, intervening causes for nonperformance in an effort to break the alleged causal link between the pandemic and any deficiency in performance.
A failure to mitigate the effects of a force majeure event may be litigated as a factor that disrupts the proximate causation linking a force majeure event and nonperformance. See e.g., Butler v. Nepple, 54 Cal.2d 589, 599 (1960) (labor strike did not excuse performance where invoking party could have found an alternative supplier whose increased costs were not “extreme and unreasonable”). Efforts to mitigate the effects of the pandemic on business commitments may take on increased significance in upcoming force majeure litigation.
Plaintiffs and defendants alike have had limited success seeking preliminary relief in COVID-19 force majeure litigation. The extraordinary nature of the pandemic has not altered the limited circumstances where courts will entertain extraordinary relief on a preliminary basis. Courts typically view force majeure as an affirmative defense. Whether government restrictions or other COVID-related factors excuse performance is viewed as a factual question that requires the development of a full record. Clients should be adequately counseled that the applicability and scope of a force majeure clause may require focused discovery and a hearty evidentiary record. See e.g., Palm Springs Mile Associates, Ltd. v. Kirkland Store’s, Inc., 2020 WL 5411353 (S.D. Fla. September 9, 2020) (dispositive motion denied where factual questions controlled whether government restrictions prevented payment of rent).
With even more difficult COVID-19 times ahead of us, the pandemic will continue to provide courts and litigants with opportunities to develop jurisprudence concerning the applicability of force majeure clauses and the common law excuse doctrines.
Michael Delaney is a director in McLane Middleton’s Litigation Department. He can be reached at (603) 628-1248 or [email protected].