COVID-19 and Possible Implications of Force Majeure Provisions in Contracts

Many companies, across industries, are wondering if they will be able to meet their contractual obligations due to COVID-19 and its far-reaching ramifications. In fact, many government restrictions, quarantines, supply chain and transportation disruptions are already impacting many companies’ performance.

The question is whether this pandemic and its effects on businesses will excuse any delays or non-performance on contracts. Specifically, how will courts interpret force majeure provisions and will COVID-19 count as a force majeure event? Ultimately, the answers depend on many factors, including the specific language of the provision in the relevant contract, the appropriate governing law, and fact or deal-specific concerns.

Businesses need to understand how force majeure provisions are triggered, how they are often interpreted, and how they may be affected by a health crisis, act of God, or government action and whether performance truly becomes impossible, impractical, or unreasonably expensive.

Force Majeure Basics and Court Interpretations

Contracts commonly attempt to address the risk of unforeseen events outside of your company’s control that will either delay or completely prevent performance through a force majeure provision. These provisions try to reduce uncertainty, allocate the risk of specified events, and excuse your company’s performance during the event. Typically, force majeure provisions include specific qualifying events that will preclude performance and several catch-all events such as acts of God, war, pandemics, labor strikes, natural disasters, governmental action or interference.

Most jurisdictions read force majeure provisions and events narrowly to avoid undermining the stability and predictability of agreements. If a catch-all is included, narrow interpretations are again applied to include only events of the same general nature as those explicitly listed. If the list of force majeure events is open-ended or includes a broad catch-all provision, the court will conduct a foreseeability test of the event in question to determine if it was a contemplated exclusion.[1]

The goal of force majeure provisions is to expand the common law doctrines of impracticability and impossibility. The starting point for interpreting force majeure provisions is the language used in the contract itself. As noted above, there is typically a list of specific triggering events that may be implicated by COVID-19 and its affiliated ramifications.

In this situation, you should review your force majeure provisions for language regarding epidemics, pandemics, viral or communicable disease outbreaks, quarantines, national emergencies, acts of God, or acts, orders, or requirements of a governmental authority. Additional language that could be helpful would be references to lack of or inability to obtain, fuel, materials, or components; disruption of supply chains or transportation systems; and disruption of the labor force. Finally, you should note if there is a catch-all phrase including ‘other similar causes’ beyond your control.

Once you have determined what triggering events are listed in your force majeure provisions, you can begin to determine if the problems you have encountered are caused by an appropriate triggering event. For example, does the provision include acts of God, pandemics, and/or acts of government, and have your employees been required to stay home and quarantine? Was your business ordered to close by the government or does a ban prevent necessary travel? Illness alone, difficulty or increased cost in securing supplies, or recommendations by the government (rather than orders) likely will not suffice.

After determining if the triggering event impacts performance and whether the event is identified specifically or in a catch-all provision, you must ask whether the triggering event was foreseeable and whether the event’s impact makes performance impossible or merely impracticable or whether mitigation efforts should be made.

Foreseeability, Acts of God, and Acts of Government

Missouri courts rely heavily on the contract language itself when determining whether an event is foreseeable. One example highlights how strictly Missouri courts will interpret the provision’s language. In SEMO Grain Co. v. Oliver Farms, Inc., a grain company and a farmer contracted for the farmer to provide the buyer with a particular amount of a certain type of soybean. The contract provided a list of items that could be impacted by “unforeseeable causes” and would accordingly excuse the parties’ performance under the contract.  The list of items included acts of God, fire, floods, and unusually severe weather, or delays of subcontractors due to such unforeseen causes. The court applied the term ‘unforeseen’ to each of the included items in the list of possible causes.

Accordingly, the court determined not every flood would be an excuse for delay, even when it ruins the crop that would enable the fulfillment of the contract, rather only those that are truly unforeseen. The court elaborated that while seasons come and go, and certain areas may be susceptible to floods or other severe weather, the “unusually severe weather” contract language would not include the seasonal, and foreseeable, high waters or severe weather at issue in the case. The court noted this applies to more than just weather, as embargoes, quarantine, or other government acts may be in effect for years or part of permanent policy. Similarly strikes may be old and ongoing rather than explosive and disruptive.

As further support of their position, the court reminded the farmer that weather issues or other complicating factors may be taken into consideration in the contract and be reflected in a higher bid price to compensation for these complications or uncertainties. In fact, the court reminded the farmer that the contract did not specify if the soybeans had to come from his farm or be grown on that particular plot of land which left him with alternative means to fulfill the contract even if it would cost him more money.[ii]

As for government interference, the 1985 case McDonnell Douglas Corp. v. Islamic Republic of Iran easily demonstrates how force majeure language regarding ‘acts of the Government’ can render performance impossible under a contract. In the late 1970s, McDonnell Douglas entered a contract to provide parts for military equipment to the Islamic Republic of Iran. Their force majeure provision excused nonperformance “which arises out of causes beyond the control and without the fault or negligence of MDC. Such causes may include, but are not restricted to… acts of the United States Government in either sovereign or contractual capacity…freight embargoes…” Shortly thereafter, the U.S. enacted embargoes and other bans on trade with Iran and McDonnell Douglas did not deliver the equipment parts as provided for under their contract with Iran. The court held the force majeure clause clearly contemplated such types of incidents and McDonnell Douglas was not held liable for breaching the contract.[iii]

These cases highlight the importance the language of the force majeure provision and that of a triggering event’s impacts being truly unforeseen. Additionally, Missouri courts will typically expect parties to utilize available alternative means to fulfill the contract rather than simply expecting their force majeure provision to protect them from liability.

Final Thoughts

The extent to which COVID-19 and its effects will qualify as a force majeure event is highly fact-specific and depends on the terms of the contract, the specific facts at issue, governing law, and how courts interpret force majeure provisions, among other things.

COVID-19 may fall within many act of God, pandemic, or act of government provisions as this pandemic has had far-reaching affects across industries, employer size, job security, and health and safety and caught the world unprepared. As local, federal, and international bodies continue to take drastic steps to protect their citizens this could have a direct impact on the interpretation and implication of these provisions.

Factors such as W.H.O.’s declaration of COVID-19 as a pandemic, travel bans, government quarantines, moratoriums, and shut-downs around the world further support the interpretation of COVID-19 as an act of God, health crisis, and/or act of government. In response, however, there are now many loan and unemployment options available for individuals, the self-employed, and businesses. These alternatives should be considered as optional means of enabling contract performance or as mitigation efforts.

As this article highlights, the issue of force majeure is highly contract- and fact- specific and should not be taken lightly. These provisions should be reviewed on a case-by-case basis taking all the possible factors into account. Keep in mind that many businesses, if not all, are struggling in some capacity and your business will need to maintain good relationships as we all hope this crisis is relatively short lived. There are other options outside of utilizing the force majeure provision; consider renegotiation of your contracts, mitigation steps, or alternative remedies under the law. This would also be the perfect opportunity to ensure any force majeure provisions cover or mention such events in your contracts entered into now and going forward to prevent uncertainty in the future.

Should you have any questions regarding what your options may be under your relevant contracts, please do not hesitate to contact our office and arrange a time to speak with one of our corporate attorneys.

For additional COVID-19 related information, go to our Coronavirus/COVID-19 Resource Center.

[1] Clean Uniform Co. St. Louis v. Magic Touch Cleaning, Inc., 300 S.W.3d 602 (Mo. Ct. App. E.D. 2009), reiterating Missouri’s general position that if a party to a contract wants its performance excused upon the happening of a reasonably foreseeable event arising after formation, they must expressly provide for that contingency even if the event would render performance impossible, impractical, or commercially-frustrated. An event that is reasonably anticipated and not listed is not excusable, additionally the force majeure clause allocates such risk even if the event or effect is one the parties could not anticipate or control. The purpose of a general catch-all phrase in a provision is to relieve a party of liability when their expectations are frustrated due to an unforeseeable occurrence beyond their control.  If the event that prevents performance is not listed in the clause, but the clause contains specific events followed by a general catch-all, it is appropriate to say the general description or catchall will include only items similar to those specifically mentioned.

[ii] SEMO Grain Co. v. Oliver Farms, Inc., 530 SW.2d 256 (Mo. Ct. App. S.D. 1975); nearly identical case and reasoning on Federal level in Bunge Corp. v. H.A. Recker, 519 F.2d 449 (8th Cir. 1975).

[iii] McDonnell Douglas Corp. v. Islamic Republic of Iran, et al., 758 F.2d 341 (8th Cir. 1985).

(c) corund www.fotosearch.com