Posted by: Charles Barnett on Apr 23, 2020

Journal Issue Date: May 2020

Journal Name: Vol. 56 No. 5

By Russell Lewis, Jonathan Havens and Cornelius Sweer, with Tennessee updates by Charles H. Barnett IV

While businesses are battling the coronavirus disease 2019 (COVID-19) — the most challenging epidemic the world has faced since the Spanish Flu outbreak that occurred after World War I — their contractual obligations do not disappear. Force majeure may, however, excuse those obligations. But as discussed below, force majeure may be a limited potential solution, rather than a panacea.

A Brief Overview of Force Majeure

Force majeure generally refers to the excusing of performance under contracts because of either “acts of God” (e.g. hurricanes) or human events beyond a party’s control (i.e. wars). In the United States, force majeure can be asserted either as an affirmative defense to breach of contract, or by a preemptive declaratory judgment action. 

Most U.S. jurisdictions, including Tennessee,1 look first to the language of the force majeure clause and only use common law rules to “fill in the gaps” where the contract is silent.2 However, some U.S. jurisdictions (notably New York and California) will typically read additional common law requirements into force majeure clauses; for example, the event giving rise to the force majeure claim must be “unforeseeable” or “beyond the reasonable control” of the party.3 While force majeure clauses vary from short boilerplate to full-page bespoke provisions, clauses typically include:

  •  a laundry list of events which may give rise to force majeure (sometimes expressly including epidemics); 
  •  a “catch-all” provision for other events “beyond the reasonable control” of the party asserting force majeure;
  •  a requirement that the party claiming force majeure give notice to the counterparty; and 
  •  a requirement that the party claiming force majeure uses reasonable diligence to perform despite the force majeure event.4

But even if an event is expressly listed in the force majeure clause, to successfully claim force majeure, a party typically must be prevented from performing its obligations by the event.5 In other words, force majeure is not a “get out of jail free” card in tough economic times. U.S. courts typically hold that economic hardship standing alone is insufficient to excuse performance under a force majeure clause.6 

Precedent of Force Majeure in Past Outbreaks and Epidemics

Despite the history of the Spanish Flu, we could find no reported cases from any U.S. jurisdiction that addressed force majeure in the context of an epidemic, pandemic or disease outbreak in the human population. Instead, caselaw from the time of the Spanish Flu focused on whether parties were excused from contractual performance using the common law impossibility7 defense rather than force majeure.8 So, the few cases addressing force majeure in the context of epidemics all concern epidemics in domesticated animals (such as avian flu, swine flu or similar diseases).

For instance, in Rembrandt Enterprises, the court reasoned that a force majeure clause in a contract for an egg producer to purchase an industrial egg dryer would not apply, as the producer’s performance (paying cash for the dryer) was not prevented by the 2015 avian flu outbreak that caused the purchaser to eliminate over a million chickens and cut egg production by 50 percent.9 Likewise, in Macromex SRL, the Southern District of New York confirmed an arbitration award rejecting a force majeure claim in a contract for the sale of chicken to a Romanian company, when the Romanian government imposed an import ban on chicken based on an avian flu outbreak (in chickens, not people).10 In rejecting the seller’s force majeure defense, the arbitrator pointed to the fact that the U.C.C. allows for commercially reasonable alternatives for performance, and that the buyer had proposed the seller ship the chicken to a nearby country unaffected by the import ban. These few cases addressing force majeure and epidemics illustrate that, even in the face of an epidemic such as COVID-19, parties must also satisfy the other elements of their force majeure clauses to secure relief.11

While not directly relevant to its force majeure analysis, the court in Rembrandt Enterprises noted that the egg producer “declared a force majeure to its buyers and began distributing eggs and egg products on a pro rata basis.”12 The court also noted that the egg producer in Rembrandt Enterprises, “was largely compensated for the damages from the avian flu outbreak by insurance and government payments.”13

 

Analysis: Considerations for Assessing COVID-19 Force Majeure Issues

In the limited caselaw applying force majeure clauses to epidemics, courts appear to apply force majeure clauses narrowly. Where COVID-19 has a direct effect on a party’s performance, force majeure may excuse performance (depending on the specific terms, including whether epidemics are specifically included), such as the egg producer’s successful declaration of force majeure to its egg buyers. In contrast, where COVID-19 affects issues secondary to performance, such as impairing a party’s ability to pay, it is possible that force majeure will not excuse performance. Caselaw also suggests that courts analyzing force majeure clauses may also consider other factors related to a party’s ability to perform its contractual obligations during an epidemic like COVID-19. A business may have insurance policies that provide coverage for losses due to an epidemic like COVID-19. Likewise, the government may support businesses impacted by COVID-19. 

However, unlike the situations in cases addressing animal epidemics, governments have taken actions in response to the COVID-19 pandemic that we have not seen since the Spanish Flu, such as: (1) shelter-in-place orders, (2) prohibiting operation of entire categories of businesses (such as bars and restaurants), and issuing construction moratoriums, emergency declarations and the like. For example, if a city has issued a construction moratorium, general contractors and subcontractors may have arguments supporting force majeure claims and extensions of time under their contracts. As governments take increasingly aggressive steps to slow the spread of COVID-19, we expect many businesses will be prevented from performing their contractual obligations in one way or another.14 

In summary, depending on the specific language of the force majeure clause, failure to perform a contractual obligation because of COVID-19 may be excused. But a party should be prepared to prove how COVID-19 prevented performance and that there were no other reasonable alternatives to performance. A party should also be ready to prove that it used due diligence to overcome the effects of COVID-19.
 

This article was originally published in The Houston Lawyer, vol. 57 no. 5, and is reprinted with permission. This version has been updated for Tennessee.

RUSSEL LEWIS is a partner and department chair of litigation for the Houston office of Baker Botts LLP. He has substantial experience helping clients navigate matters that include complex commercial cases, crisis response, class actions and government investigations. Lewis graduated magna cum laude from Tulane University Law School in 2002.

JONATHAN HAVENS is a senior associate in the Houston office of Baker Botts LLP. He advises clients on a broad range of energy and complex business matters, including force majeure claims. Havens graduated from Duke University School of Law in 2013.

CORNELIUS SWEERS an energy litigation and construction associate in the Houston office of Baker Botts LLP. He advises clients on a broad range of energy, construction and general commercial matters, including force majeure claims. Sweers graduated with highest honors from the University of Texas School of Law in 2016.

CHARLES H. BARNETT IV, contributed to this article. He practices civil litigation and is an associate in the office of Spragins, Barnett & Cobb PLC in Jackson, Tennessee. He is a 2018 graduate of the University of Memphis Cecil C. Humphreys School of Law. He can be reached at chb4@spraginslaw.com.


NOTES
1. While there are Tennessee cases applying force majeure as an affirmative defense to a breach of contract claim, there are no Tennessee cases interpreting force majeure clauses in contracts. See, e.g., Butts v. S. Fulton, 565 S.W.2d 879, 882 (Tenn. Ct. App. 1977) (discussing the force majeure affirmative defense) (“Any misadventure or casualty is said to be caused by the ‘Act of God’ when it happens by the direct, immediate, and exclusive operation of the forces of nature, uncontrolled or uninfluenced by the power of man and without human intervention.”). As such, Tennessee courts have never addressed whether Tennessee follows the majority or minority rule. However, since there are no Tennessee cases that establish a body of common law doctrines for interpreting force majeure clauses, it appears unlikely that Tennessee courts would adopt the minority rule.

2. E.g., TEC Olmos, LLC v. ConocoPhillips Co., 555 S.W.3d 176, 181 (Tex. App.—Houston [1st Dist.] 2018, pet. denied).

3. See, e.g., Watson Labs. Inc. v. Rhone-Poulenc Roher Inc., 178 F.Supp.2d 1099, 1110 (C.D. Cal. 2001) (Under California common law, courts read an unforeseeability requirement into force majeure clauses); Goldstein v. Orensanz Events LLC, 146 A.D.3d 492, 493 (N.Y. App. Div. [1st Dept.] 2017) (a force majeure clause “must be interpreted as if it included an express requirement of unforeseeability or lack of control.”).

4. See, e.g., TEC Olmos, LLC, 555 S.W.3d at 179.

5. See, e.g., Sherwin Alumina L.P. v. Aluchem Inc., 512 F. Supp. 2d 957, 967 (S.D. Tex. 2007) (finding that in order for the force majeure clause to excuse performance, party must not be able to produce the product at all or within the time specified in the contract).

6. See Valero Transmission Co. v. Mitchell Energy Corp., 743 S.W.2d 658, 663 (Tex. App—
Houston [1st Dist.] 1987, no writ) (“An economic downturn in the market for a product is not such an unforeseeable occurrence that would justify application of the force majeure provision, and a contractual obligation cannot be avoided simply because performance has become more economically burdensome than a party anticipated”); U.S. v. Panhandle E. Corp., 693 F. Supp. 88, 96 (D. Del. 1988) (noting that “American courts routinely refuse to excuse performance” because of adverse economic conditions); Route 6 Outparcels v. Ruby Tuesday Inc., 910 N.Y.S.2d 408, 2010 WL 1945738 (N.Y. Sup. Ct. May 12, 2010) (granting summary judgment on defendant’s defense that recession was a force majeure event because recession was foreseeable and did not prevent performance); OWBR LLC v. Clear Channel Commc’ns, 266 F. Supp. 2d 1214, 1223 (D. Haw. 2003) (rejecting force majeure claim based on post- September-11 travel disruption and economic downturn, finding that “nonperformance dictated by economic hardship is not enough” to be excused under a force majeure provision).

7. The impossibility defense was focused on an “act of god” and so was narrower than a typical force majeure event, which can include human events beyond a party’s control.

8. Several cases have analyzed force majeure’s common law precursor, impossibility, in the context of pandemics but the cases are of limited applicability because the holdings were based on policy reasons, not contractual language. Compare Phelps v. Sch. Dist. No. 109, Wayne County, Ill., 221 Ill. App. 500, 503 (Ill. App. Ct. 1921) (holding that a teacher was entitled to her monthly salary of $50 per month even though the “school was closed because of the influenza epidemic” because the teacher was ready, willing and able to teach) with Sandry v. Brooklyn Sch. Dist. No. 78 of Williams County, 182 N.W. 689, 690 (N. D. 1921) (holding that a bus driver was not entitled to his salary while the school was closed because of the epidemic of influenza despite being ready, willing and able to drive).

9. See Rembrandt Enterprises Inc. v. Dahmes Stainless Inc., No. C15-4248-LTS, 2017 WL 3929308 at *1-3, *13 (N.D. Iowa, Sep. 7, 2017).

10. See Macromex SRL v. Globex Intern. Inc., 2008 WL 1752530 (S.D.N.Y. Apr. 16, 2008) aff’d 330 Fed. Appx. 241 (2d. Cir. 2009).

11. See id. (confirming arbitral award finding performance in contract for sale of chicken not excused by Romanian government’s import ban on chicken imposed in response to avian flu outbreak when substitute performance was available and suggested by the buyer); SNB Farms Inc. v. Swift and Co., 2003 WL 22232881 (N.D. Iowa, Feb. 7, 2003) (undisputed that outbreak of Porcine Reproductive and Respiratory Syndrome which led to hog production problems qualified as force majeure event under hog production contract, court found a fact issue on whether hog producer provided proper notice of the force majeure event).

12. See Rembrandt Enterprises, 2017 WL 3929308 at *1-3.

13. Id.

14. The analysis in this article discusses contracts between and among private parties.  Force majeure issues also arise as to agreements with administrative agencies of federal, state and local governments. Those agreements may present unique force majeure issues not addressed above.