The Force Majeure Defense to Contractual Nonperformance
March 24, 2020
Governments around the world have imposed unprecedented restrictions on travel, work and social gatherings to curb the spread of COVID-19. Companies in every sector of the economy and individuals in all walks of life have experienced disruption. From brides and grooms with spring weddings, to Fortune 500 executives grappling with new trade restrictions, people are revisiting contracts drafted in a pre-COVID-19 world to see how they hold up in our new global reality. Much of the focus will be on force majeure clauses.
Force majeure clauses excuse a party’s nonperformance when extraordinary events or circumstances prevent a party from fulfilling its contractual obligations. In determining the applicability of a force majeure clause, New York courts generally consider: (1) whether the specific event or type of event preventing performance was listed in the force majeure clause; (2) whether the risk of nonperformance was foreseeable; and (3) whether performance was truly impossible and not merely impracticable or economically difficult. The applicability of force majeure clauses is contract-specific and the defense is a relatively narrow one.
The starting point and often the crux of the court’s inquiry is whether the event giving rise to nonperformance is specifically listed in the force majeure clause. In the COVID-19 context, this means that force majeure clauses that include words like “pandemic,” “epidemic,” or “disease,” are more likely to excuse performance made impossible due to COVID-19. On the other hand, ambiguous references to “health-related issues,” which are common in force majeure clauses, may be interpreted to refer to the health of the parties only, and are less likely to excuse contractual performance made impossible by COVID-19. Likewise, specifics with regard to qualifying governmental restrictions (e.g., denial of necessary licenses, restraints on imports and exports, etc.), will make it more likely that a court will accept a nonperforming party’s defense of force majeure founded on an enumerated governmental restriction.
Global health emergencies such as the COVID-19 outbreak are a relatively unexplored area of force majeure litigation. It is conceivable that courts will loosen or tighten certain aspects of their analysis to account for new market realities and public policies in the wake of COVID-19. For example, courts may be loath to punish nonperformance occasioned by COVID-19 where a party took recommended measures to curb the spread of the disease, but contractual performance was not literally impossible. Alternatively, faced with a rush of nonperforming defendants claiming force majeure, courts may tighten the requirement that the specific force majeure event be listed in the clause. A party’s efforts to mitigate risk – often a highly-relevant factor in the court’s analysis – may take on added weight when considering whether performance was truly rendered impossible by COVID-19.
Where a contract does not contain a force majeure clause or has a narrow force majeure clause, there are various other contractual, statutory and common law defenses that nonperforming parties may invoke to excuse performance made impossible by COVID-19. For example, in the M&A and corporate finance fields, a material adverse change (MAC) clause may, under certain circumstances, excuse performance. In trade, Uniform Commercial Code (UCC) Article 2 excuses a seller from untimely or non-delivery of goods where its performance has become impracticable because of unforeseen supervening circumstances or governmental regulations. See N.Y. UCC § 2-615(a). In addition, the common law doctrines of impossibility and impracticability may excuse nonperformance where a party establishes that an unexpected intervening event occurred that made performance impossible or impracticable. Note that in New York, this doctrine excuses performance only where it is truly impossible, rather than merely impracticable.
In addition to considering various defenses to nonperformance, companies anticipating potential nonperformance by themselves or their counterparties should review applicable insurance policies and provisions, including business interruption and contingent business interruption insurance.
The attorneys at Moses & Singer are closely monitoring the commercial and legal implications of the COVID-19 outbreak and are at the ready to help you navigate these uncertain times. Do not hesitate to contact the authors of this article should you seek further advice.