In the wake of the Coronavirus (COVID-19) pandemic, state and local governments throughout the U.S. have ordered restaurants, bars, and shopping centers to shut down, while businesses that sell essential products can remain open. Due to the pandemic, small and large companies are forced to close their doors and find clever ways to remain competitive in a world where “dining in” is no longer an option.
As companies prepare for the unknown, they should also ask how this turbulent time will affect their contracts, and more importantly, whether they are still required to perform their contractual obligations during this global health crisis. This article will provide a thorough analysis of the force majeure defense that may excuse a party from performing his or her otherwise required contractual duties.
What is Force Majeure?
Force majeure—which means “superior force” en français—excuses a party’s nonperformance of a given contractual duty when an unanticipated event, such as a pandemic or epidemic, occurs. The force majeure defense is available by statute and the force majeure clause, which is included in many contracts.
Force Majeure By Statute
Section 1511 of the Cal. Civ. Code provides that a party is excused from a contractual obligation when performance is prevented or delayed by (1) operation of law or (2) an irresistible or superhuman cause.
Operation of Law, Cal. Civ. Code 1511 (1)
The broad language of section 1511 (1) invites the question of whether Governor Newsom’s Stay at Home Order renders performance of a contractual obligation illegal, impracticable, or frustrates the underlying purpose for why both parties entered into the contract. California courts have consistently reinforced the broad language of section 1511.
For instance, in Indus. Dev. & Land Co. v. Goldschmidt, 56 Cal. App. 507 (1922), the plaintiff entered into a commercial lease agreement that restricted his use of the property to the operation of a liquor business. After Congress passed the Prohibition Amendment, the plaintiff argued that he was excused from paying any further rents because the operation of his business became illegal. The court sided with the plaintiff, finding that the lease agreement became inoperative after the passage of the 18th Amendment, which made performance of his contractual duty illegal. Id at 509.
Likewise, in Johnson v. Atkins, 53 Cal. App. 2d 430 (1942), the court held that a Colombian buyer was not liable for breach of contract because the Colombian government refused to issue the buyer a legal permit to accept a shipment. The court reasoned that had the buyer accepted the goods he would have committed an unlawful act, which justified his nonperformance. Id. at 432.
However, just because an event may fall within the purview of section 1511(1), it does not mean that a party is automatically excused from satisfying their contractual obligations. There are limits to this rule, and each potential application of section 1511 will require a fact-intensive inquiry of the circumstances.
In Dwight v. Callaghan, 53 Cal. App. 132 (1921), for instance, the defendant claimed he could not satisfy his contractual duties because the U.S. government purchased a large quantity of the same materials the defendant needed to satisfy his contractual obligations. The court found that the plaintiff had acquired the same materials from other suppliers such that the government’s interference with defendant’s performance did not render performance impossible; but, instead, just more expensive than the defendant had initially anticipated. Id. at 137. This case, and the many that came after it, showcases how the concept of force majeure can be misused by parties and how what appears “impossible” to one person is, in reality, just merely more difficult. In such circumstances, a Court will not permit a party to avoid liability simply because performance is more costly or burdensome than originally anticipated. See Habitat Tr. for Wildlife, Inc. v. City of Rancho Cucamonga, 175 Cal. App. 4th 1306, 1336 (2009).
Turning to the present and the Coronavirus pandemic, it is hard to say how broadly (or narrowly) section 1511 (1) could arguably be applied to excuse performance of contracting parties. On one hand, whether performance of a given contractual duty will result in a violation of Governor Newsom’s Stay at Home Order thereby making it illegal is unclear. Police have not begun enforcing the order, by either ordering people to return home or issuing citations (at least at the time of this article). However, government actions are evolving, and it is reasonable to predict that Governor Newsom may order law enforcement officials to enforce the executive order by way of citations or other means. On the other hand, by issuing an order that requires individuals to remain at home and “shelter in place,” and that requires months’ long closures of businesses, Governor Newsom’s Order almost certainly prevents, or at the very least delays, performance of certain categories of contractual obligations. If that is the case, then a vast amount of contractual duties will likely be excused.
Irresistible or Superhuman Causes, Cal. Civ. Code 1511 (2)
“Acts of God” encompass the latter section of 1511(2), and excuse a party’s nonperformance if a natural event, like a pandemic, earthquake, or flood occurs that renders performance impossible. In most instances, the court’s ruling will often turn on whether the natural event was unanticipated by the parties at the time of contracting. See Ryan v. Rogers, 96 Cal. 349 (1892).
For example, in Ryan v. Rogers, 96 Cal. 349 (1892), the defendant pleaded that he was unable to complete his deliveries because heavy rainfall had flooded his usual delivery route. The court found that the defendant knew—before signing the contract—that rainstorms were a common occurrence during that time of year, and defendant’s usual delivery route was often flooded after a heavy rainstorm. Based on these findings, the court concluded that the flood was not unforeseeable, but expected at some point during the life of the contract and held the defendant liable for breach of contract. Id. at 353.
In comparison, the court in Ontario Deciduous Fruit-Growers’ Ass’n v. Cutting Fruit-Packing Co., 134 Cal. 21 (1901) held that a farmer was excused from furnishing specific varieties of fruit because the farmer’s orchards were “so far affected by an extraordinary drought.” Id. at 25. The court concluded that the farmer “[cannot] be made to perform impossibilities” in light of extreme weather conditions that were not contemplated by the parties when they signed the contract. Id.
Both cases teach us that courts are not willing to excuse a party’s nonperformance just because a natural event, like severe weather, interferes with the party’s performance. The court’s critical inquiry is whether the natural event was foreseeable by the parties when they executed the contract. If an impediment to a party’s performance is anticipated or foreseeable at the time of contracting, courts take the position that the party concerned about such impediment should draft contract terms to account for such risk or concern.
In closing, the Coronavirus pandemic may on its surface qualify as an “Act of God.” However, different from the courts’ usual probe, the main question here will be whether the Coronavirus qualifies as a “natural event” for purposes of section 1511 (2). Some argue that the Coronavirus outbreak is a natural event because we did not intentionally create the virus; rather, it is a natural product of our interactions and actions. Even if the Coronavirus does not meet the definition of “natural event,” the resulting effects of the pandemic, such as Governor Newsom’s order touched on above, would likely trigger the application of section 1511 to a variety of otherwise required contractual obligations. Courts throughout California will be forced to answer these questions with no precedent to rely on, as our country has not been confronted with a global health crisis, like this one, before.
Force Majeure By Contract
Before resorting to section 1511, nonperforming parties should first turn to their contract to determine whether a force majeure clause is included in their contract. Force majeure clauses are worded differently from contract to contract; but, generally, a force majeure clause will excuse a party’s nonperformance (or delay performance) of a given contractual duty when an unanticipated event specified in the clause occurs, rendering performance temporarily impossible.
The occurrence of an event specified in the force majeure clause does not automatically excuse a party from fulfilling their contractual commitments. Instead, the nonperforming party claiming nonperformance was justified due to an unforeseen event must satisfy two requirements.
The first requirement is the event that caused the party’s nonperformance must have been unforeseeable at the time the parties signed the contract. This requirement is akin to the analysis above regarding section 1511(2) and the holding in Ryan v. Rogers, 96 Cal. 349 (1892).
Second, performance must have been “impracticable” or “impossible” when performance was due, which largely mirrors the analysis of section 1511(1). Specific to force majeure provisions included in a contract, the nonperforming party must demonstrate that performance would cause them to suffer “an extreme loss, expense, difficulty, or injury.” Butler v. Nepple, 54 Cal. 2d 589, 599 (1960). However, a party cannot avoid liability merely because performance was more costly or burdensome than originally anticipated. Id.
In Butler v. Nepple, Nepple breached the contract because the steelworkers’ union went on strike, and he could not obtain the steel needed to satisfy his contractual commitments. Critical to Nepple’s argument was that the force majeure clause specified that if the steelworkers’ union went on strike, his performance was excused. Despite the clear language of the force majeure provision, the California Supreme Court disagreed. The court held that Nepple failed to show the other steel manufacturers’ prices were “extreme and unreasonable” based on what he usually paid. The court concluded that had Nepple satisfied his contractual obligations and obtained the requisite steel, Nepple would have only incurred a “mere increase in expense,” which does not justify a party’s nonperformance of a given contractual duty. Id.
Force majeure clauses are often overlooked during contract negotiations and are not given the attention they deserve. As such, businesses and people alike may find that their contracts contain boilerplate force majeure clauses that do not specifically address the Coronavirus pandemic. Whether a force majeure clause covers the current Coronavirus pandemic will not only depend on the exact language of the provision itself (e.g. acts of god, “catch-all” provisions), but also the specific circumstances of the case and to what extent the unforeseen event impacted a party’s performance—was it made impractical, or just more difficult?
It must be clarified that the defenses described, including the ones by statute, will likely only excuse a party’s performance temporarily. A party must resume satisfying its contractual obligations if and when it is no longer impossible to do so.
Protecting Your Legal Interests Right Now
The Coronavirus pandemic has made us question whether we can perform our contractual obligations, whether the other party has the means to perform, and what measures we should take to protect our interests. Below are some tips that address each of these questions:
Have You Determined That You Cannot Perform Your Contractual Duties?
- Explore and evaluate other options to complete performance—that is, like Nepple, seek out alternative suppliers, vendors, etc., and determine the added expense of using such alternative options;
- Communicate your position with the other contracting parties early to make each party aware of the circumstances, and to see whether you can work together to facilitate a resolution.
Are You Owed Performance?
- Contact the performing party to ensure that they can or intend to satisfy their contractual obligations during the pandemic.
- If the performing party cannot uphold their contractual commitments, then explore other options with the nonperforming party to find a solution, if possible. Courts frown upon non-breaching parties that refuse to work with the nonperforming party during a national crisis.
Are You Drafting A Contract?
- Include a force majeure clause that specifies if the Coronavirus makes performance illegal or impossible, then the party is excused from performing its contractual obligations.
- Force majeure clauses can also include any events that the parties believe will safeguard their interests. Do not be afraid to add any other language such as national emergency, terrorist attacks, riots, civil unrest, executive orders, etc.
Conclusion
Overall, the discharge of a given contractual duty is a fact-intensive inquiry that is determined on a case-by-case basis. If you are unsure whether your performance is excused or whether you can hold a party in breach of a contract for failing to perform, then speak to a California attorney for guidance.
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