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Coronavirus and Force Majeure: Who Is Liable?

Coronavirus and Force Majeure: Who Is Liable?

Senior partner Logan Johnson has extensive experience with cases involving force majeure, including a recent matter where he recovered $190 million for a client on the eve of trial. Together with associate Benjamin Cohen, he offers the following analysis of coronavirus and potential force majeure disputes that are likely to occur domestically and internationally.

While the Novel Coronavirus (also known as COVID-19) appears poised to inflict considerable damage on human populations across the world, it is also likely to exact a grave toll on the global economy. Supply chains are already being impacted by coronavirus and resulting governmental measures intended to slow its spread. It has been more than 100 years—in the Spanish flu epidemic of 1918—since the world has seen a contagion with this level of global impact.

Contractual parties have declared, and may increasingly invoke, force majeure to excuse performance of contracts affected by the spread of coronavirus and its widespread socio-economic consequences. This development has executives and lawyers across all industries taking a hard look at their force majeure clauses as they evaluate the impact of coronavirus and anticipate future disputes. What follows is a discussion intended to aid the review and evaluation of force majeure clauses both in the United States and internationally in the context of the coronavirus crisis.

Considerations for Domestic Force Majeure Disputes

U.S. courts tend to narrowly construe force majeure clauses because such clauses operate to undo contractual obligations that parties have voluntarily assumed.[1] A standard clause will typically list a series of events that the parties have agreed constitute a force majeure event. Most clauses also include a catchall category of events “beyond the reasonable control” of the contracting parties as force majeure events.

The following example is the force majeure clause supplied in the North American Energy Standards Board’s form gas purchase agreement:

Force Majeure shall include, but not be limited to, the following: (i) physical events such as acts of God, landslides, lightning, earthquakes, fires, storms or storm warnings, such as hurricanes, which result in evacuation of the affected area, floods, washouts, explosions, breakage or accident or necessity of repairs to machinery or equipment or lines of pipe; (ii) weather related events affecting an entire geographic region, such as low temperatures which cause freezing or failure of wells or lines of pipe; (iii) interruption and/or curtailment of Firm transportation and/or storage by Transporters; (iv) acts of others such as strikes, lockouts or other industrial disturbances, riots, sabotage, insurrections or wars; and (v) governmental actions such as necessity for compliance with any court order, law, statute, ordinance, regulation, or policy having the effect of law promulgated by a governmental authority having jurisdiction. Seller and Buyer shall make reasonable efforts to avoid the adverse impacts of a Force Majeure and to resolve the event or occurrence once it has occurred in order to resume performance.

Contracts that specifically identify public health emergencies or governmental action as force majeure events are most likely to excuse non-performance.

Contractual losses arising from a coronavirus outbreak are likely to be caused predominately by governmental or private measures intended to halt the spread of the disease, and their resulting economic impacts, rather than by instances of the disease itself. Because state courts tend to construe force majeure clauses narrowly, a force majeure clause whose language specifically encompasses either epidemics, outbreaks of disease, or similar public health emergencies (as some do), or one that broadly encompasses governmental actions, is likely to provide the best chance of enforcement.

Based on current jurisprudence, it is unclear whether the inclusion of acts of God in a force majeure clause will benefit a contractual party who invokes the clause in response to losses arising from the impacts of coronavirus. In the United States, state law typically requires that an “act of God” arise exclusively from natural forces, events, or causes.[2] For example, Texas courts have considered an event to be an act of God “when it is occasioned exclusively by the violence of nature.”[3] Similarly, the Illinois Supreme Court has held that an “act of God” must be caused directly and “exclusively by natural causes such as could not be prevented by human care, skill, and foresight.”[4] Whether a force majeure clause’s “act of God” language is likely to excuse contractual non-performance will depend on how courts interpret the role of human agency as it relates to the dispute. It can be argued that disputes arising from the actions of governments or other actors within a supply chain do not involve acts of God, even if the natural phenomenon of disease is the ultimate cause of those actions. Stated in the alternative, claims related to government action in response to coronavirus arguably do not arise exclusively from natural forces. The counterargument is that the impetus for the government action that is the basis for the declaration of force majeure is a contagion that arises exclusively from natural forces and causes.

Catchall phrases covering causes “beyond the reasonable control of the party” will be read in light of the language of the larger force majeure provision.

Parties may next look to so-called “catchall” provisions contained in many force majeure clauses. This catchall language typically extends the provision to include not only the enumerated events, but also “other causes beyond the reasonable control of the party.” As in contract interpretation generally, a U.S. court interpreting a catchall phrase will seek to give effect to the intent of the parties. In doing so, U.S. courts tend to look to the larger force majeure provision in determining the meaning of catchall language.

Courts often apply the interpretive canon known as ejusdem generis when determining the scope of a catchall phrase in a force majeure clause. Under this canon, general terms (i.e. “other causes beyond the reasonable control of the party”) that are accompanied by an express enumeration of examples are understood to refer to matters of the same general type as the examples listed.[5] So, language referring to “other causes beyond the reasonable control of a party” may be interpreted as including only causes that are similar to and “of the same general class” as the force majeure events specifically enumerated in the subject contract.[6]

Catchall language only covers events that are not foreseeable.

The events explicitly covered by a force majeure provision may also inform a court’s interpretation of catchall language because they indicate the types of events that the parties contemplated the provision would cover. When a nonperforming party claims force majeure based on a catchall provision rather than an event explicitly contemplated in the contract, courts “extend [force majeure] only to those situations that were demonstrably unforeseeable at the time of contracting.”[7] When a term is omitted from a delineated list of force majeure events, it tends to be assumed that the parties intended the omission.[8]

A major factor affecting the application of force majeure clauses relates to which governmental actions are deemed foreseeable force majeure events.

Few states have directly defined when governmental regulation reaches the level of a force majeure event. In Northern Illinois Gas, an Illinois appellate court determined that the mere issuance of an order by a regulatory agency did not rise to the level of a force majeure event justifying breach. Instead, the court determined that “[w]hat is required is that the [governmental] order clearly direct or prohibit an act which proximately causes non-performance or breach of a contract.”[9]

Common law rules have also been understood to inform and supplement contractual force majeure provisions.[10] In assessing the related doctrines of contractual impossibility and frustration, state courts have taken a variety of positions regarding whether governmental action needs to be foreseeable to constitute a force majeure event. For example, New York courts have held that “a party seeking to rescind a contract must show that the intervening act was unforeseeable, even if the intervening act consisted of the actions of a governmental entity or the passage of new legislation.”[11] Courts in other states, such as Texas, have placed less emphasis on foreseeability in evaluating whether the doctrine of impossibility applies to contracts supervened by illegality and other forms of governmental authority.[12] Ultimately, even where exercises of governmental authority such as imposing travel bans and quarantines rise to the level of a force majeure event, determining foreseeability will involve a fact intensive inquiry undertaken on a case-by-case basis.

Under the common law of some states, parties are presumed to contract with knowledge of the underlying law.[13] While the emergency measures taken by various governmental units will likely have a basis in enabling legislation that preexisted most contracts—something the law may presume the parties to have been aware of—there may be some variability as to (1) whether courts deem the preexisting legislation itself sufficient to put the parties on notice that its application was foreseeable or (2) whether the unforeseeability of the event precipitating the use of the legislatively-authorized measures (i.e. the outbreak of coronavirus) is sufficient to render the exercise of governmental emergency measures unforeseeable (even if the parties should have been aware of the power of the government to use those measures). The extent to which courts may focus on the unforeseeability of precipitating facts versus the possible foreseeability of the legal action itself may have substantial significance in addressing force majeure claims arising from government action taken in response to the potential spread of coronavirus.

International Law Considerations

Many of the same considerations and canons of contract interpretation discussed above will apply to international commercial contracts governed by foreign law. English law, for example, is a common choice of law in international commercial contracts and its force majeure jurisprudence shares some similarities with United States law. However, there are several important distinctions with regard to English law’s treatment of force majeure clauses worth noting:

For instance, English law provides no general definition for what constitutes a force majeure event. Instead, definitions of force majeure must be supplied within the terms of the contract. Mere reference to “force majeure” events without a contractual definition for what comprises these events is likely to be held void for uncertainty.[14] Although ultimately the contours of a force majeure provision are a creature of the contract, the wording of most force majeure clauses will be interpreted as implying a causation requirement—meaning that a party seeking to invoke it generally must show that the applicable force majeure event is the only effective cause of non-performance, rather than simply a pretext or one cause among many.[15]

Under English law, the wording of a force majeure clause may also affect the extent to which an event must affect a party’s ability to perform before it rises to the level of force majeure. A clause effective when performance is “hindered” will be more easily satisfied than one requiring that a force majeure event “prevent” performance. For a party to be “prevented” from fulfilling its contractual obligations, a force majeure event must make the promised performance physically or legally impossible. When the language of a force majeure clause merely refers to “hindering” performance, this may include events that render performance difficult to a sufficient degree, but that do not make performance impossible as would be required by “prevent” language. A change in economic circumstances affecting a contract’s profitability or the ease with which a party may perform under a contract is generally not considered to be a force majeure event under English law.

English law does not permit parties to invoke a force majeure clause in response to their own deliberate default or a failure to perform caused by their own negligence. English courts have also held that in order for a force majeure clause to apply, the sole cause of a party’s injury must be the force majeure event.[16] In addition, unlike in many U.S. jurisdictions, English law does not require the event triggering the force majeure clause to be unforeseeable. However, even under English law, a force majeure clause is more likely to be enforceable if an event is not foreseeable because lack of foreseeability reduces the possibility that application of the force majeure doctrine would be barred by a party’s own negligence or failure to mitigate the consequences of the event.

Conclusion

Force majeure clauses are often treated as boilerplate provisions and given little specific attention. However, when and how a force majeure clause may be invoked reflects a complex interplay between the terms of the provision and the contract’s governing law. In assessing whether a given contract’s force majeure provision encompasses non-performance due to coronavirus and its resulting effects, parties must analyze both the language of their specific contract’s force majeure provision and the general interpretive conventions that the applicable law will apply in interpreting that provision.

A court’s application of a force majeure clause will start with the delineated force majeure events. In the context of the coronavirus crisis, if an epidemic or pandemic is a listed force majeure event, then that is likely the beginning and the end of the analysis: coronavirus and related governmental actions probably will constitute force majeure. However, listing contagion in a force majeure clause is rare, so courts will then turn to whether the coronavirus epidemic constitutes an act of God and whether it was foreseeable. As discussed above, these analyses likely will hinge on the perceived role of human agency. Practitioners drafting contractual terms in today’s environment would be well advised to assume that an epidemic and pandemic such as coronavirus is now foreseeable and to consider addressing such a potential event (i.e. an epidemic or pandemic of known or unknown contagion) in their force majeure clauses.

Schiffer Hicks Johnson is a Houston-based litigation firm with an exception trial record and a pragmatic, business-oriented approach. For more information, please contact Logan Johnson at or 713-357-5161.


[1] See, e.g., Route 6 Outparcels, LLC v. Ruby Tuesday, Inc., 27 Misc. 3d 1222(A) at *4, 910 N.Y.S.2d 408 (Sup. Ct. 2010), aff’d, 88 A.D.3d 1224, 931 N.Y.S.2d 436 (2011) (“Further, it is [a] well established rule of contract law that force majeure clauses must be narrowly construed.”); Hess Corp. v. ENI Petroleum US, LLC, 86 A.3d 723, 727 (N.J. App. 2014) (“Force majeure clauses are narrowly construed.”).

[2] See Black’s Law Dictionary (10th ed. 2014) (defining “Act of God” as “an overwhelming, unpreventable event caused exclusively by forces of nature, such as an earthquake, flood, or tornado”) (emph. added).

[3] McWilliams v. Masterson, 112 S.W.3d 314, 320 (Tex. App. – Amarillo 2003, pet. denied)

[4] Wald v. Pittsburgh, Cincinnati, Chicago & St. Louis R.R. Co., 162 Ill. 545, 551, 44 N.E. 888, 889 (1896).

[5] See, e.g., Kel Kim Corp. v. Cent. Markets, Inc., 70 N.Y.2d 900, 902–03, 519 N.E.2d 295, 296–97 (1987); Save Our Little Vermillion Env’t, Inc. v. Illinois Cement Co., 311 Ill. App. 3d 747, 752, 725 N.E.2d 386, 390 (3d Dist. 2000) (“Under the doctrine of ejusdem generis, where general words follow an enumeration of specific things of a particular class, the general words are to be construed as applying only to things of the same general class as those enumerated.”).

[6] Save Our Little Vermillion Env’t, 311 Ill. App. 3d at 752.

[7] URI Cogeneration Partners, L.P. v. Bd. of Governors for Higher Educ., 915 F. Supp. 1267, 1287 (D.R.I. 1996); see also Clean Unif. Co. St. Louis v. Magic Touch Cleaning, Inc., 300 S.W.3d 602, 610 (Mo. Ct. App. 2009) (“The purpose of a general, catch-all phrase, such as ‘causes beyond [the parties’] control’ in a force majeure or escape clause is to relieve a party of liability when the parties’ expectations are frustrated due to an ‘unforeseeable occurrence’ beyond the parties’ control.”).

[8] See TEC Olmos, LLC v. ConocoPhillips Co., 2018 WL 2437449, at *6 (Tex. App. May 31, 2018).

[9] N. Illinois Gas Co. v. Energy Co-op., Inc., 122 Ill. App. 3d 940, 951–52, 461 N.E.2d 1049, 1058 (1984).

[10] See Watson Laboratories, Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099, 1110 (C.D. Cal. 2001) (“Moreover, elements of the common law force majeure defense are often read into the force majeure provision of a contract.”); Kleberg Cnty. v. URI, Inc., No. 13-14-00158-CV, 2016 WL 363114, at *13 (Tex. App. Corpus Christi – Edinberg Jan. 28, 2016) (pet. filed) rev’d on other grounds by URI, Inc. v. Kleberg Cnty., 543 S.W.3d 755, 771 (Tex. 2018) (“Contractual terms are controlling regarding force majeure with common law rules merely filling in gaps left by the document.”).

[11] RW Holdings, LLC v. Mayer, 131 A.D.3d 1228, 1230, 17 N.Y.S.3d 171, 173 (N.Y. App. Div. 2015).

[12] See Centex Corp. v. Dalton, 840 S.W.2d 952, 954–55 (Tex. 1992).

[13] See Monroe Dearborn Ltd. P’ship v. Bd. of Educ. of City of Chicago, 271 Ill. App. 3d 457, 462 (1st Dist. 1995) (“The court must give effect to the intent the parties had at the time they entered into the agreement as evidenced by the language used in the contract . . . and it is presumed that the parties contracted with knowledge of the existing law.”) (internal citation omitted); see also Federated Am. Ins. Co. v. Marquardt, 108 Wash. 2d 651, 658, 741 P.2d 18, 23 (1987) (“A contract is not considered impaired by a statute or regulation in force when the contract was made, since it is presumed that the contract was made in contemplation of existing law.”).

[14] British Electrical and Associated Industries (Cardiff) Ltd v Patley Pressings Ltd [1953] 1 WLR 280.

[15] Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 (Comm).

[16] Maritime Inc v. Limbungan Makmur SDN BHD [2019] EWCA Civ 1102.