COVID-19’s catastrophic effect on the U.S. economy is beyond comprehension – not only impacting millions of business relationships governed by contract, lease or other agreement nationally – but with alarming scale and scope in New York. As of April 10, 2020, New York alone has suffered 5280 deaths and the city remains at a standstill with most civilians sheltering in place. The State government has “ordered and directed” all “non-essential” businesses to suspend operations to help contain the spread. This has decimated business operations across myriad industries. Only “essential” industries are permitted to continue to operate and everyone else, through circumstances “completely beyond their control,” have been limited to work remotely, to the extent that it can be done, or have been required to completely suspend service. The damage is enormous—by some estimates, a $4 trillion impact to the economy. With contracts becoming impossible or impracticable to perform under, an historically seldom-used but truly sweeping contractual provision is becoming all the more relevant: the Force Majeure clause. Even for non-lawyers, it is hard to overlook its name. It seems more fitting as the title of a war film than a legal concept. However, where present, legal effect and impact could be incredibly dramatic. Force Majeure is a legal doctrine implicated when extreme unforeseen events, beyond the control of the parties, make performance under a contract impossible or truly impracticable. Typically, only “Acts of God” qualify: events like tornados, hurricanes, war, rioting, labor strikes and/or terrorist attacks. You may be subject to contractual obligations which you cannot fulfill due to Coronavirus shutdown; your business is considered non-essential and shuttered, thus: a) there are no funds to pay the rent; b) workers are furloughed, so it’s impossible to make the goods you have sold or seek to sell; or c) a wedding or other prepaid gathering or event has been indefinitely postponed, so performance is impossible. Whether Force Majeure applies to the COVID-19 pandemic is a novel issue which will certainly reach the Courts in short order. In the interim, Farber Schneider Ferrari LLP recommends, close contract scrutiny to see whether it contains a Force Majeure clause, since without one, this discussion is moot.
What is a Force Majeure Clause?
Force Majeure translated literally from French, means “superior force.” The legal concept, as defined by Black’s Law Dictionary (“Blacks”), is “an event which can neither be anticipated nor controlled.” Farber Schneider Ferrari LLP believes that COVID-19 could be construed as such an event.
Blacks defines a “force majeure clause” as “contractual provision allocating the risk of loss if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled.” Consistently, New York’s Court of Appeals holds “Generally, a force majeure event is an event beyond the control of the parties that prevents performance under a contract and may excuse nonperformance.” Beardslee v. Inflection Energy, LLC, 25 N.Y.3d 150, 154 (2015).
However, such clauses have been typically interpreted by Courts to be language specific and subject to negotiation of the parties. See e.g. Urban Archaeology Ltd. v. 207 E. 57th St. LLC, 68 A.D.3d 562 (1st Dept. 2009). This means if there is no force majeure clause, then none can be implied. See Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902–03 (1987).
This pandemic is, no doubt, an extreme unforeseen event, beyond the control of any party to any contract. However, as discussed below, Health epidemics and pandemics are rarely, if ever, listed specifically in Force Majeure clauses. As a result, can such a clause be invoked to excuse performance under a contract? It is our opinion, if a force majeure clause, containing typical force majeure language, as discussed below, exists within a contract, invocation should permit excuse of performance.
The Narrow Construction of Force Majeure Clauses
Readers be cautioned: in addition to Courts not implying such a provision, “Interpretation of force majeure clauses is to be narrowly construed.” Reade v. Stoneybrook Realty, LLC, 63 A.D.3d 433, 434 (1st Dept. 2009). “[They] are to be interpreted in accord with their function, which is to relieve a party of liability when the parties' expectations are frustrated due to an event that is an extreme and unforeseeable occurrence, that was beyond [the party's] control and without its fault or negligence.” Team Mktg. USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 942 (3d Dept. 2007).
Moreover, “Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party's performance will that party be excused.” Kel Kim Corp., 70 N.Y.2d at 902–03.
Since standard wording of force majeure clauses does not reference pandemics or viral contagions, specific events relevant to COVID-19 could include excuse of performance due to: (1) “orders or directives” by governmental bodies; or (2) a catchall provision (e.g. in addition to listing specifics like terrorism, war, extreme weather events, etc., it typically contains a clause excusing performance upon “any unforeseeable causes beyond the reasonable control of the party”).
As a matter of contractual interpretation, if a force majeure clause only contains specific events, no catchall, and no events regarding health emergencies, or governmental orders/directives, there may be a significant obstacle to proceeding on this ground. However, omission of such language is rare.
When catchall language is present, still, only the most extreme events are considered force majeure. It is black letter law that “When the event that prevents performance is not enumerated, but the clause contains an expansive catchall phrase in addition to specific events…words constituting general language of excuse are not to be given the most expansive meaning possible, but are held to apply only to the same general kind or class as those specifically mentioned.” Team Mktg. USA Corp. v. Power Pact, LLC, 41 A.D.3d at 942–43,; see also Kel Kim Corp. v. Cent. Markets, Inc., 131 A.D.2d 947, 950 (3d Dept. 1987) aff'd, 70 N.Y.2d 900.
Parties Should Be Excused from Performance of a Contract Rendered Impossible or Impracticable by COVID-19
Under the above legal construct, if your contract is rendered impossible or impracticable by COVID-19 or any governmental response thereto, assuming it contains a force majeure clause with governmental orders or directives or catchall language, and the shutdown has made it impossible or impracticable for you to perform under your contract, you should be able to invoke it to excuse performance.
There is no doubt that COVID-19 is beyond the control of the parties. See Beardslee, 25 N.Y.3d at 154. It is inarguable that governmental orders and/or directives have driven the impossibility or impracticability. See Kel Kim Corp., 70 N.Y.2d at 902–03. In addition, we assert that no reasonable person would argue that it, or the response is not extreme and unforeseeable and not of the kind generally mentioned in force majeure clauses. See Team Mktg. USA Corp., 41 A.D.3d at 942.
These are unprecedented times, and this seldom-used provision may become more relevant than ever. To fully understand whether contracts will be excused from performance by invocation of a force majeure clause, contact Farber Schneider Ferrari LLP for more information.
Daniel Schneider is a founding partner of Farber Schneider Ferrari LLP. Copyright FARBER SCHNEIDER FERRARI LLP 2020
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