March 25, 2020
As previously noted (https://www.ecg.law/blog/everything-has-shut-down-is-my-contract-still-enforceable), the first place to look is the force majeure (act of God) clause in your contract. This, of course, raises the question: Does your contract have a force majeure clause? If so, what does that clause say? Does it, expressly or impliedly, cover pandemics? Many list “epidemic” or “pandemic” among the typical laundry list of qualifying events. See Aukema v. Chesapeake Appalachia, LLC, 904 F.Supp.2d 199, 206 (N.D. NY 2012) (stating the “term ‘force majeure” as used herein shall be Acts of God, strikes, lockouts, or other industrial disturbances, acts of the public enemy, wars, blockades, riots, epidemics, lightning, earthquakes, explosions, accidents ….”)
But even if your particular force majeure clause does not specifically list an epidemic or pandemic as an event excusing contractual performance, it is possible—indeed likely—the language used could be interpreted by implication to cover such highly unusual events. This is because, even though courts originally interpreted such clauses narrowly (it really did take “an act of God” to excuse performance!), in modern times courts are more apt to take a broader, more lenient view and ask, “Is the event causing the inability to perform an important contractual duty something the parties could have reasonable foreseen?” For example, in Commonwealth Edison Co. v. Allied-General Nuclear Servs., 731 F. Supp. 850, 855 (N.D. Ill. 1990) the court said “including in the contract a standard, boilerplate, catch-all force majeure provision invokes a body of common law doctrine that is largely indistinguishable from the doctrine of impossibility (or impracticability) ….” Likewise, the court in Neal-Cooper Grain Company v. Texas Gulf Sulphur Company, 508 F.2d 283, 293 (7th Cir. 1974) applied the elements of Uniform Commercial Code’s impracticability defense even though the contract before it contained a force majeure clause that specifically enumerated events not among those relied upon by the party seeking to be relieved of its contractual commitments.
Although many cases apply this modern test, with varying results, in the context of floods, tornadoes, hurricanes and other rare but regularly reoccurring weather events, only one known published decision within the past 100 years appears to have done so in the context of a wide-spread disease outbreak. In that case, Rembrandt Enterprises, Inc. v. Dahmes Stainless, Inc., 2017 WL 3929308 (N.D. ID 2017) (“Rembrandt”), an Idaho federal court declined to grant summary judgment (immediate victory) to a large-scale producer of eggs and egg products who claimed the Highly Pathogenic Avian Influenza (Avian Flu) forced it to eliminate over a million birds, which large-scale loss in turn cut its output capacity by more than half. The court declined to grant such immediate relief even though it acknowledged “[t]he outbreak was notorious and engendered a large amount of media coverage and government intervention.” It insisted the matter first go to trial because “[t]he causes of the Avian Flu outbreak are disputed. [The egg producer seeking to be excused] asserts that it took appropriate precautionary measures to avoid the outbreak and spread of an Avian Flu type illness. [The party seeking to enforce the egg producer’s contractual commitments contrarily] contends [the egg producer] increased its risk by having an ‘inline’ production model in which eggs are hatched, raised, and processed in the same location. [The same party] posits that if these operations were kept separate, the impact of an Avian Flu outbreak could have been limited.”
It should be stressed Rembrandt does not say the egg producer would not ultimately be relieved of its commitments. Rembrandt merely illustrates how a party seeking to enforce a contract against a force majeure claim might raise factual questions that need to be resolved at trial before a court grants such sweeping relief.
Arguably, Rembrandt was an unusual situation. In the midst of the present economic crisis, most individuals and businesses saddled with contractual commitments they cannot, at least now, perform cannot similarly be accused of failing to take appropriate action to avoid the governmentally mandated shutdown. Nor (wild conspiracy tales fostered by the Chinese Communist Party aside) can they be accused of causing the pandemic. On the other hand, it is conceivable (albeit not likely) parties seeking relief could be accused of failing to implement steps to reasonably mitigate pandemic-related problems temporarily preventing contractual performance. One thing, however, is certain: Absent widespread governmental intervention to avoid such claims, in the near future there will be a “flood” of force majeure claims resulting from the current shutdown.
Finally, please note strict compliance with the technical requirements of your contract may be required to successfully assert a force majeure claim. Many contracts require prompt notice of one’s inability to perform owing to an unforeseen event. Several courts have refused parties’ force majeure claims when they failed to provide adequate notice under the contract. See, e.g., Three RP Limited Partnership v. Dick’s Sporting Goods, Inc., 2019 U.S. Dist. LEXIS 22534, at *14 (E.D. OK 2019), quoting Sabine Corp. v. ONG Western, Inc., 725 F. Supp. 1157, 1168 (W.D.Okla.1989) (“failure to give proper notice is fatal to a defense based upon a force majeure clause requiring notice’”). Even though the courts have, at least for now, for the most part shut down, this probably does not excuse a failure to comply with this important contractual requirement.
Author: David A. Robinson, President and Founding Shareholder, Enterprise Counsel Group