Can Force Majeure (Coronavirus) Help You Avoid Contractual Obligations?
Coronavirus (Covid-19) outbreak has caused significant business interruptions. Some businesses are hoping to invoke a force majeure clause to excuse nonperformance of contracts, including commercial leases.
What is Force Majeure?
Force majeure excuses contractual nonperformance, when the nonperformance is caused by unforeseen events beyond the control of both parties that either make contract performance impracticable or frustrate the purpose of the performance. Force majeure, or “superior force," simply means "no man is responsible for that which no man can control." Cal. Civ. Code § 3526. In general terms, a force majeure clause is triggered when an "Act of God" renders performance so impracticable that it may be excused. An “Act of God,” however, is not what matters as a force majeure actually is broader because it can include matters caused by humans.
In this light actual impossibility to perform is not the standard. Courts may accept a force majeure contractual provision simply by showing “commercial impracticability.” (See, Seaboard Lumber Co. v. U.S., 308 F.3d 1283, 1294 (Fed. Cir. 2002)). California courts will look at the facts and determine if a contract is excused when an (1) unforeseeable event, (2) outside of the parties' control, (3) renders performance impossible or impracticable. (See, Habitat Trust for Wildlife, Inc. v. City of Rancho Cucamonga (2009) 175 Cal.App.4th 1306, 1336: "'The impracticability does not require literal impossibility but applies when performance would require excessive and unreasonable expense. . .(citation). Similarly, where performance remains possible, but the reason the parties entered the agreement has been frustrated by a supervening circumstance that was not anticipated, such that the value of performance by the party standing on the contract is substantially destroyed, the doctrine of commercial frustration applies to excuse performance. (Lloyd v. Murphy (1944) 25 Cal.2d 48, 53, 153 P.2d 47.)”
In practice, a contract may define specific events that would constitute a force majeure, including 1) earthquake; 2) flood; 3) fire; 4) epidemic; 5) terrorism; 6) war; etc. even though exact enumeration is not necessary. Force majeure in contract interpretation is a defense to a breach of contract claim where performance is rendered impracticable or impossible by an extraordinary event thereby excusing performance. In determining whether an event constitutes a force majeure, California courts have held it "is not necessarily limited to the equivalent of an act of God. The test is whether under the particular circumstances there was such an insuperable interference occurring without the party's intervention as could not have been prevented by the exercise of prudence, diligence and care." Pac. Vegetable Oil Corp. v. C.S.T., Ltd., (1946) 29 Cal. 2d 228, 238.
The key for business owners when writing or entering commercial contracts is to know force majeure clauses may vary depending on the nature of the contract, and the parties may decide what events will apply. (See, Cal Civ. Code § 1511: Performance of an obligation under a contract may be excused "[w]hen it is prevented or delayed by an irresistible, superhuman cause . . . unless the parties have expressly agreed to the contrary"). For all intents and purposes the general principles of impracticability or impossibility govern, and the parties must establish the event was unforeseen, uncontrollable or impracticable in order to invoke a typical force majeure clause. (See, Pac. Vegetable Oil Corp., 29 Cal. 2d at 238).
Does COVID-19 Qualify as a Force Majeure Event?
The World Health Organization declared Covid-19 a pandemic. Accordingly, if the force majeure clause specified specific events such as epidemics, quarantine, biological contamination or other public health emergency, Covid-19 would likely to fall under this definition. If the force majeure clause is silent on pandemics (likely) Covid-19 may not automatically constitute a force majeure. Given that State and Federal Orders restricting certain activities, such as travel, movement, and large gatherings practically shut down certain business ventures, “acts of government” may apply. Because restaurants and bars must shutdown as a result of governmental orders, some commercial tenants might be able to invoke force majeure clause in their lease, even if not specifying pandemic or related health crises.
Businesses invoking force majeure should work to show it is effectively impossible to perform their contractual duties as a result of Covid-19. Businesses must know, however, inability to pay rent will not automatically be excused just because of poor economic conditions. It is Covid-19, and the resulting governmental orders, that have made performance of the lease impossible. For sure businesses having difficulty paying rent during this time must immediately give notice they are relying on the Covid-19 force majeure as ground to seek rent avoidance.
What if the Contract Does Not Have Force Majeure Clause? Do Not Panic!
If a force majeure clause is absent from a contract, parties can still rely on the common law defenses:
· Impossibility: Performance is no longer objectively possible because of a supervening event.
· Impracticability: A supervening event changes the inherent nature of performance, causing it to become more difficult, complex, or challenging, thereby contravening a basic assumption of the parties’ contract.
· Frustration of Purpose: When an unforeseen event undermines a party's principal purpose for entering into a contract, and both parties knew of the principal purpose at the time contract was made, the contract may be terminated.
The bottom line is Covid-19 is unprecedented, and unchartered. Businesses are failing and must use every tool in its arsenal to regain an edge; no stone should go unturned to ensure every possible advantage. Give your landlord and/or other contracting party notice you are invoking the force majeure clause. There is also a moratorium on commercial evictions. Give notice and keep fighting.
