I. Impact of COVID-19 on Existing Contracts: Is Performance Still Required?

The spread of COVID-19 has plunged the country into a period of dramatic uncertainty. The uncertainty that many have seen in everyday life also extends to existing contractual relationships. Businesses across industries are asking whether they or their counterparties will be able to perform their contractual obligations in light of the COVID-19 outbreak and its secondary impacts. Government restrictions, quarantines, supply chain and transportation disruptions, and general economic turbulence are already impacting performance. But will the existence of the pandemic and its effects on businesses excuse delays or non-performance under a contractual force majeure clause? The answer will turn on, among other factors, the specific language of the force majeure clause in the applicable contract, the contract's governing law, and the specific facts at issue.

As businesses develop plans for addressing this international emergency, this client alert provides guidance to inform strategic decision-making with respect to contractual relationships. We focus on three discrete issues related to force majeure clauses that all businesses should consider: (i) key terms in force majeure clauses that may be triggered by current events; (ii) jurisdictional differences in how courts may interpret force majeure clauses; and (iii) the impact of the triggering event on performance, and whether performance has become truly impossible, impracticable, or unreasonably expensive.

II. Force Majeure Clauses – Purpose and Triggering Terms

Force majeure clauses allocate risk between contracting parties by relieving obligations under exceptional and/or unforeseeable circumstances deemed beyond the control of the parties. These clauses expand upon the common law doctrines of impracticability and impossibility, which also may relieve parties of their contractual obligations (even in the absence of an express force majeure clause).

As with all contract terms, the starting point for interpreting force majeure clauses is the language used on the face of the contract. Many force majeure clauses set out specific triggering events, which tend to vary by contract. The following triggering events, if listed in a force majeure clause, may be implicated by COVID-19 and current events:

• Epidemic / pandemic / viral or communicable disease outbreak
• Quarantines
• Lack of or inability to obtain fuel, power, components, or materials
• Disruption of supply chains
• Disruption of transportation systems
• Disruption of labor force
• National emergency
• Act, order, or requirement of any governmental authority
• "Act of God"¹
• A "catch-all" phrase such as "or other similar causes beyond the control of such party"

As a starting point, businesses should review their contracts closely to determine which triggering events are listed within their contracts' force majeure clauses, and whether the problems they are facing in fact were caused by the triggering event as defined by the specific language of the contract. For example, has their workforce fallen ill, or been advised or mandated to stay home? Has a facility been ordered closed by the government or is procurement of supplies merely more expensive? Has an event space closed or travel become ill-advised or prohibited? Businesses should also carefully review their contracts' notice and dispute resolution provisions and make sure they comply with any specific requirements for invoking a force majeure clause or raising an inability to perform.

III. Force Majeure – Jurisdictional Differences

Courts interpreting force majeure clauses recognize an inherent tension between enforcing contractual obligations and excusing them in exceptional and unforeseeable circumstances. While courts in different jurisdictions generally consider the same factors in their analysis, they apply these factors differently, often in ways that can prove case-dispositive.

For example, courts in Delaware and Texas tend to give more weight to the precise language of the agreement, giving the parties more control over the allocation of risk.² As one Texas court explained, "when the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure."³ The practical effect is that businesses may find fewer obstacles to invoking force majeure clauses in contracts governed by Delaware or Texas law.

New York courts, in contrast, take a more doctrinal approach, governed by the understanding that "force majeure clauses are to be interpreted in accord with their function, which is to relieve a party of liability when the parties' expectations are frustrated due to an event that is an extreme and unforeseeable occurrence, that was beyond the party's control and without its fault or negligence."⁴ In practice, this means that New York courts generally interpret force majeure clauses more narrowly than courts in other jurisdictions. New York courts also may require not only that the contract's force majeure clause include the specific trigger event, but also that the trigger event be unforeseeable.⁵

Another area of divergence under New York law is the extent to which the triggering event renders a party fully unable to perform. The New York Court of Appeals (the highest New York state court) has noted that the common law impossibility defense "excuses a party's performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible" and that force majeure clauses "provide a similarly narrow defense."⁶ This approach contrasts starkly with how the Ninth Circuit Court of Appeals characterizes California law: "a promisor invoking a force majeure clause [must] show that, in spite of skill, diligence and good faith on his part, performance became impossible or unreasonably expensive."⁷ In short, courts vary as to whether performance must be truly impossible or simply not practicable. Outcomes of individual cases are likely to turn on fact-specific inquiries and jurisdictional variances.

Even if a force majeure clause does not apply, common law defenses such as impossibility and impracticability continue to exist in most jurisdictions. These defenses may still be applicable, depending on the jurisdiction and particular circumstances.

IV. Force Majeure – COVID-19 and Fact-Specific Issues

In light of these issues, businesses should consider the following questions in evaluating the impact of COVID-19 on existing contractual relationships:

1. What is the triggering event impacting performance? (Pandemic, governmental response, economic downturn,⁸ supply chain issue, workforce issue, etc.)
2. Is the triggering event directly encompassed by the force majeure clause term? If not, is there a catch-all term?
3. What state's law governs the contract?
4. Was the triggering event foreseeable?
5. How did the event affect performance? Is performance impossible or impracticable? Could non-performance have been avoided? Were any efforts taken to mitigate non-performance?
6. What remedies does the force majeure clause provide with respect to performance or otherwise under the contract (e.g., does it allow for termination of the contract, excuse performance of certain obligations with the contract continuing, or permit a delay for as long as the force majeure continues)?
7. What steps does a party need to take to exercise these rights (e.g., is there a notice requirement) and what remedies or options does the other party have?

The challenge for a party seeking to invoke force majeure is to answer each of these questions in a coherent manner that ties together situational factors, contractual language, and jurisdictional variation. For example, it doesn't help if COVID-19 qualifies as a "viral outbreak" or "epidemic" covered by the language of the agreement, if it isn't the "virus" itself that prevented a business from delivering computer components, but rather some separate downstream effect, or if the performance is not actually prevented, but merely inconvenient. Similarly, it won't matter that a government edict prevented timely shipment if the contract's force majeure provision is limited to "acts of God." Absolute impossibility of performance will be required under some contracts and by some jurisdictions, while the ability to perform or mitigate non-performance will change as circumstances continue to evolve.

Successful invocation of a force majeure clause accordingly will turn on a number of highly factual, context-specific, nuanced factors. There is no single answer as to whether COVID-19 constitutes a force majeure excusing performance. Moreover, as events change and continue to unfold—especially through further spread of disease, governmental control efforts, and economic disruptions—businesses should closely monitor how shifting dynamics may implicate the express triggering events listed and the effect on performance. Many businesses will no doubt find themselves on both sides of this issue, as both promisor and the promisee, depending on the circumstance. We likewise advise businesses to keep these factors in mind when entering into new contracts for which there is a risk of COVID-19 impacting future performance.

V. Conclusion

When considering these issues, it is incumbent to keep in mind that the present challenges are being felt on a massive scale throughout society. The hope for all of us is that the ravages of COVID-19 will pass quickly. In the meantime, it is important to remember that everyone is struggling, and that more than ever businesses will need to maintain, as much as possible, good relationships. As such, we strongly encourage negotiated resolutions where they can be reached. 

^[1] “Acts of God” are generally understood to include accidents caused by forces of nature. Whether a viral outbreak can qualify as an act of God will likely depend on a variety of factors, and is likely to be litigated in the coming years.

^[2] See, e.g., Stroud v. Forest Gate Dev. Corp., Civ. A. No. 20063-NC, 2004 WL 1087373, at *4-5 (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.”); see also Sun Operating Ltd. P’ship v. Holt, 984 S.W.2d 277 (Tex. App. 1998).

^[3] Sun Operating, 984 S.W.2d at 283.

^[4] See In re Cablevision Consumer Litig., 864 F. Supp. 2d 258, 264 (E.D.N.Y. 2012) (citations omitted).

^[5] See Goldstein v. Orensanz Events LLC, 146 A.D.3d 492, 492 (1st Dep’t 2017) (despite the force majeure clause applying to “any cancellation,” “the clause must be interpreted as if it included an express requirement of unforeseeability or lack of control”).

^[6] Kel Kim Corp. v. Central Mkts., Inc., 70 N.Y.2d 900, 902 (1987) (emphasis added).

^[7] Jin Rui Grp., Inc. v. Societe Kamel Bekdache & Fils S.A.L., 621 F. App’x 511, 511 (9th Cir. 2015) (emphasis added).

^[8] Courts generally agree that an economic downturn, even if connected to an otherwise triggering event, does not amount to a stand-alone force majeure event.  See e.g. OWBR LLC v. Clear Channel Commc’ns, Inc., 266 F.Supp.2d 1214, 1223 (D. Haw. 2003) (“[F]orce majeure clause[s] do[] not excuse performance for economic inadvisability, even when the economic conditions are the product of a force majeure event.”); Travel Wizard v. Clipper Cruise Lines, No. 06 Civ. 2074 (GEL), 2007 WL 29232 (S.D.N.Y. Jan. 3, 2007) (economic downturn following 9/11 did not suffice on its own to trigger force majeure clause).