Written By: Steve Lawrence & Miranda Preston
Steve Lawrence and Miranda Preston
In response to the COVID-19 pandemic, federal, state and local governments and health authorities have issued declarations of emergency, proclamations and orders intended to slow the spread of the virus. Many of these actions have resulted in businesses cancelling or postponing events and closing or limiting business operations indefinitely. Major events throughout the World have been cancelled or postponed, including the 2020 Summer Olympics, nearly all professional and amateur sporting events in the United States, the Coachella and South by Southwest music festivals, and many others. As a result, many businesses will be forced to analyze whether they can perform under contracts they signed before the COVID-19 outbreak.
When unforeseen circumstances arise after a contract is signed, there are certain legal doctrines that may excuse non-performance or delay in performance of a party’s contractual obligations. These doctrines include the application of contractual force majeure clauses and the related doctrines of impracticability of performance and frustration of purpose. This article addresses the application of these concepts where a party’s performance is impacted by the COVID-19 pandemic.
What is Force Majeure? If the parties included a force majeure clause in the contract, certain circumstances may excuse performance under the contract. Merriam-Webster defines “force majeure” as: “(1) superior or irresistible force; and (2) an event or effect that cannot be reasonably anticipated or controlled.” In a contract setting, “force majeure” generally refers to a clause that excuses or delays a party’s performance due to unforeseen events outside the control of the parties. Force majeure provisions are generally found in the boilerplate section of a contract and, prior to the pandemic, were rarely the subject of negotiation among the parties. Given the sudden halt to the global economy caused by COVID-19, there has been a recent surge of interest in force majeure provisions.
The types of events that may constitute a force majeure event vary significantly from contract to contract. Some of the more commonly encountered clauses define force majeure events to include natural disasters (such as floods, earthquakes and hurricanes), war, terrorist acts or government action (such as eminent domain or change in laws). “Acts of God,” are also frequently included as force majeure events, or even a catch-all provision such as “events beyond the reasonable control” of the parties. The words “epidemic” or “pandemic” are rarely included as force majeure events.
To Prevail in a Force Majeure Claim. To claim that an event of force majeure exists, there must be: (1) a force majeure provision in the contract; and (2) the force majeure event (here, the circumstances of COVID-19) must be a cause of the party’s inability to perform. The ability to delay or excuse performance will depend on the specific terms of the force majeure clause as applied to the facts surrounding the contractual arrangement. Courts generally do not liberally enforce force majeure clauses. However, the unprecedented circumstances of COVID-19 appear to be ripe for parties to debate whether contract performance should be excused.
Type of Force Majeure Clause: Broad or Specific. The ability to succeed in a force majeure claim may depend on whether the force majeure language in the contract is broad or a specific. Broad force majeure provisions contain general language excusing performance for events that are “beyond the reasonable control of the parties,” and do not specifically reference “pandemics” or an “epidemic.” Under a broad force majeure clause, whether COVID-19 is a “force majeure event” will depend on an interpretation of the provision itself. Courts will be forced to analyze whether the circumstances of COVID-19 constitute an “Act of God” or an “event beyond the reasonable control of the parties.” Interestingly, the COVID-19 pandemic includes both a worldwide virus and governmental action in response. Specific force majeure provisions include a specific list of events, the occurrence of which would excuse or delay party’s performance. To potentially excuse performance as a result of COVID-19, the clause must specifically include “pandemic” or “epidemic” as a force majeure event. If pandemics or epidemics are listed as force majeure events, and if the party can demonstrate the COVID-19 pandemic caused their inability to perform, a specific form of force majeure clause is more likely to excuse the party’s performance than a broad, general clause.
Force Majeure Alternatives. Even if a contract does not contain a force majeure provision, a party’s performance may be excused by the events of the COVID-19 pandemic under the related doctrines of impracticability of performance, frustration of purpose or impossibility. The doctrine of impracticability of performanceapplies when certain events occurring after a contract is made constitute an impediment to performanceby either party. The frustration of purpose doctrine deals with the problem that arises when a change in circumstances makes one party’s performancevirtually worthless to the other.[1] In that case, performance remains possible, but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event.[2] The doctrine of impossibility of performance applies when performance of the agreement is strictly impossible. Arizona is among the jurisdictions recognizing a more modern definition of impossibility that includes cases of physical impossibility, as well as cases of extreme impracticability.[3] Courts analyzing these theories often assess whether the event causing the non-performance was something that could have been anticipated. Without a force majeure provision in a contract, though, courts may be called upon to apply these doctrines.
Arizona Law. There are relatively few Arizona cases that interpret either a broad form or specific form of force majeure provision.[4] The Federal District Court was called upon to interpret a force majeure provision and apply Arizona law in B.F. Goodrich Co. v. Vinyltech Corp., 711 F. Supp. 1513 (D. Ariz. 1989). Vinyltech entered into an agreement with B.F. Goodrich for the purchase of resin that Vinyltech used to manufacture of PVC pipe. Subsequently, Vinyltech had an opportunity to buy the resin at a lower price and sought to cancel its prior orders with Goodrich, and be excused from performance the contract. Vinyltech claimed that the change in market conditions (i.e., the price for the resin) was beyond its control and economically precluded it from continuing to purchase resin from B.F. Goodrich. The contract contained a force majeure clause that included a list of specific force majeure events, as well as a catch-all force majeure event allowing the parties to be excused from performance and relieved from liability under the contract for “any other cause or causes of any kind or character reasonably beyond the control of the party failing to perform . . . .”
Having not found any Arizona case law directly interpreting a force majeure provision, the Court examined the doctrine of impracticability, which does not typically affect discharge as a result of mere market shifts or financial inability. As a result, the court concluded that, “Arizona courts would likely find that the force majeure provision does not contemplate or incorporate market shifts or financial inability.”
Interestingly, Vinyltech also argued that the doctrine of frustration of purpose ought to apply to this situation. Under Arizona law, however, commercial frustration has not been treated as a blanket remedy for parties looking to discharge a contractual obligation on the basis of changes in price or market conditions, stating “Vinyltech cannot now contend for purposes of its commercial frustration argument that a change in prices or market conditions was not a reasonably foreseeable event.” The Court granted summary judgment in favor of B.F. Goodrich.
The lesson of the B.F. Goodrich case is that mere change in economics or the market are not likely to be found within a broad form of force majeure provision under Arizona law. The question remains, however, what if there is a change in the market or the price of goods in a contract that is directly caused by the circumstances of COVID-19? Courts will be facing this question in the aftermath of the COVID-19 pandemic.
Practical Tips. Given the current circumstances, either side of any contract may have difficulty performing to the terms of the agreement. We recommend the following as an action list to consider as you plan your next steps.
- Review your Current Contracts Closely. Does your contract have a force majeure provision? Is the language broad, or does it specifically refer to an epidemic or pandemic? Does the force majeure clause excuse performance all together, or simply suspend the contract until the force majeure event is over?
- Procedural Issues. If you intend to claim that there are force majeure provisions in your agreement that allow you to be excused from performance, are there any applicable notice provisions? Are there any other procedural measures to consider? Does the force majeure provision only carve out the time when the event of force majeure applies or does it allow for termination of the agreement all together?
- If Your Contract Does Not Have a Force Majeure Provision. If your agreement does not include a force majeure clause (or if it does, but the clause would not apply to excuse a party’s performance as a result of the effects of the COVID-19 pandemic), examine alternate theories of excuse or delay of performance under the doctrines of frustration of purpose, impossibility, and/or impracticability.
- Considerations for New Contracts. Consider whether to include a broad or specific form of force majeure clause in any new contract. Given the likelihood of continuing or repeat circumstances like the COVID-19 pandemic, consider whether a right of termination would be appropriate if a force majeure event exists, or merely suspension of performance.
If you have any questions regarding your contractual obligations, the business transactions team at Milligan Lawless is here to assist. Please contact Steve Lawrence at 602-792-3635 or steve@milliganlawless.com, or Miranda Preston at 602-792-3511 or miranda@milliganlawless.com.
[1] Restatement (Second) of Contracts § 265 cmt. a (1979).
[2] 7200 Scottsdale Rd. Gen. Partners v. Kuhn Farm Mach.,184 Ariz. 341, 345 (Ariz. App. 1995).
[3] Id.
[4] See A.R.S. § 33-801(6) (providing a definition of “force majeure” for purposes of Arizona law regarding mortgages).
