The Coronavirus (COVID 19) Pandemic and Force Majeure Clauses
If you find yourself wondering how the current coronavirus crisis will affect your business, YOU ARE NOT ALONE. The associated upheaval has put the lives of tens of millions of Americans on hold and thrown the plans of many businesses into limbo. Contracts between parties — even those written just weeks ago — often seem wholly inadequate to address the conditions we are operating under now. What’s a business to do?
Well, while drafters of contracts could not have predicted the severity and speed of the coronavirus’ spread, the law does have a term for events like this: force majeure.
What Does Force Majeure Mean?
Force majeure — meaning ‘superior force’ in French — has a specific legal meaning in the American legal framework. It generally applies to events that are unavoidable, unpredictable, and outside the control of those party to the contract. Acts of God, impossibility, and frustration of purpose are other terms that are related to the idea of a force majeure clause.
Contracts often include force majeure clauses in the document which excuse a party’s performance of its contractual obligations. The intent of these clauses is to avoid otherwise harsh penalties as a result of extreme events unrelated to the contracting parties. Some occurrences that have typically invoked force majeure have been hurricanes, major flooding, strong earthquakes, and war. The question that is likely on your mind right now is: Does the coronavirus pandemic qualify as a force majeure event?
Would Non-Performance Due to COVID-19 Trigger a Force Majeure Clause?
The answer, as it so often is, is that it depends. Contracts and agreements frequently contain their own specific force majeure clauses. The first thing a party to contract should do is check the language used in each of the force majeure clauses. In America, the laws of each state govern a court’s interpretation of a disputed contract.
Force Majeure in Michigan
Michigan has less of a history of cases interpreting force majeure than some other states, but that does not mean that our court’s orders will be drastically different from decisions made elsewhere. While non-binding, Michigan courts have found the reasoning used by courts in other states to be persuasive and have applied them to Michigan cases in the past. Businesses contracting with parties both inside and outside Michigan should not generally expect a wildly divergent outcome when Michigan law has not previously addressed the matter.
Erickson v. Dart Oil & Gas Corp1. dealt specifically with the doctrine of force majeure and was heavily influenced by the decisions of other jurisdictions In this oil and gas case, the court was asked to determine whether a delay in oil well permitting triggered a contract’s force majeure clause. Feeling that there was not enough Michigan common law that addressed the issue of force majeure, the court drew on the persuasive decisions reached by the Supreme Court of Montana and the Court of Appeal of Louisiana.
The Montana case2 turned on a force majeure clause in a land lease for an oil well that afterwards suffered a delay in production due to saltwater seepage. In the end, the court decided the contract’s force majeure clause would have successfully terminated the lease, except for the exacerbating actions of the invoking party. The Louisiana case3 was similar. There, the dispute in question was a party’s cancellation of a mineral lease for an oil well that did not produce for ninety days by invoking the contract’s force majeure clause. The resulting decision by the court was that the otherwise valid force majeure clause was inapplicable because of the party’s lack of due diligence in exploring options that could have mitigated the situation.
Some especially forward-thinking drafters included epidemics, pandemics, and disease as conditions that qualify as force majeure. Courts will likely find that the coronavirus satisfies these conditions. The World Health Organization declared COVID-19 a pandemic on March 12, 2020, and the United States declared a state of emergency due to COVID-19 the very next day on March 13.
Many contracts leave room for the possibility of governmental action. To prevent the spread of the coronavirus, many state governors have issued shelter-in-place orders that have closed the doors of businesses deemed to be non-essential. Governments both outside and inside the United States have closed factories and some have closed borders. Parties involved in contracts that allow for non-performance due to acts of government will have an easier time triggering force majeure, but they still carry the burden of proving that it was the governmental regulation that prevented the performance of the contract.
Courts have ruled that purely economic conditions are not enough to qualify as a force majeure event. Arguments that the 2008 recession made it impossible for a party to meet the terms of its contract were not met with success4. The exception has been in cases like In re Old Carco LLC5 (cited approvingly by the Michigan case Great Lakes Gas Transmission Ltd. P’ship v. Essar Steel Minn., LLC6), in which a party successfully invoked a contract’s force majeure in response to the recession. There, the contract in question included “change to economic conditions” as a force majeure trigger.
If the current economic uncertainty of the pandemic deepens into a recession or depression, then expect that similar arguments of the unfeasibility of complying with the terms of a contract during an economic downturn will be likewise dismissed by courts, unless the force majeure language specifies otherwise. As always, check your contract.
The influential Michigan case Kyocera Corp. v. Hemlock Semiconductor7 is an example of the difference between economic difficulty and true force majeure. In this case, the market for solar panel components fluctuated greatly due to a ‘trade war’ between the United States and China. Even though this drastic change in price was caused by government action, the court did not find that government regulation made it impossible for the parties to fulfill the terms of the contract, just unprofitable.
Price fluctuations and the sudden unprofitability of certain goods or services have been a notable effect of coronavirus crisis so far, and all indications are that the instability will continue. Every Michigan business should be aware that it will, in all probability, still be held to the terms of a contract that might unexpectedly be very expensive, as long as that obligation is still technically possible to fulfill. Many businesses that are not completely blocked by a shelter-in-place order, but still find it difficult to honor a contract as normal, should keep in mind that courts can have a strict view of what qualifies as a governmental act.
But while interpretation is narrow, success is not impossible. In ANR Pipeline Co. v. Devon Energy Corp.8, the plaintiff carried the day when the court ruled that it properly invoked a force majeure clause after a series Federal Energy Regulatory Commission order, and subsequent state law, invalidated many of its customer agreements and decimated its sales. That Michigan case also positively cites the 10th Circuit Court of Appeals which found that regulation by the New Mexico Environmental Improvement Board was sufficient cause to activate a contract’s force majeure clause when that regulation would have necessitated the shutdown of a plant’s nine submerged combustion evaporators.9
An important element is often the external nature of the event. In Michigan, and many other states, a party cannot invoke a force majeure clause if that party was itself the cause of the delay or impossibility10. Courts have said that a party should make all reasonable efforts to avoid declaring their obligations to be impossible. While COVID-19 may have made fulfilling the terms of a contract difficult, businesses should take care that their responses do not cause them future difficulty when attempting to invoke a force majeure clause.
On subsequent readings, some Michigan businesses might discover that a force majeure clause in their contract or agreement is ambiguous. When an ambiguous contract must be interpreted by courts, the meaning of the unclear language will be decided by the finder of fact11. Uncertainty about whether a disruptive event triggers a force majeure clause can be stressful and possibly expensive. Parties hoping to avoid the uncertainty of a jury decision should take care to examine their contracts.
At its heart, the goal of the court is to honor the intent of the parties who entered into the contract12. Courts interpret that intent using the language of the contract itself. The closer that a coronavirus-related problem aligns with the words used in the contract, the more likely that the courts will grant that that it is a force majeure event.
What if My Contract Does Not Contain the Term ‘Force Majeure?’
Courts rely on the language of the contract to interpret and trigger force majeure clauses. But, the actual presence of the words ‘force majeure’ is not always necessary to obtain a similar result. As refenced earlier, force majeure is a close cousin to the doctrines of frustration of purpose and impossibility.
Unlike force majeure clauses, the doctrine of frustration of purpose does not depend on the contract spelling out a list of specific that excuse non-performance. But since the conditions of non-performance are not agreed upon by the parties beforehand, courts are quite strict when asked to make a decision based on the doctrine of frustration of purpose. Frustration of purpose requires three elements: “(1) the contract must be at least partially executory; (2) the frustrated party’s purpose in making the contract must have been known to both parties when the contract was made; (3) this purpose must have been basically frustrated by an event not reasonably foreseeable at the time the contract was made, the occurrence of which has not been due to the fault of the frustrated party and the risk of which was not assumed by him.”13
The doctrine of impossibility applies when “due to circumstances beyond the control of the parties the performance of a contract is rendered impossible, the party failing to perform is exonerated.” When courts say ‘impossible,’ they mean that “there must be a showing of impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved.” Just as with force majeure, mere financial difficulty is not enough to excuse non-performance.
Overall, a force majeure clause would be the preferred way to release a party from the contract’s terms of performance. Courts generally choose to operate using the conditions in the contract that all parties have agreed upon, in order to better follow the intent of the contract when it was signed. However, as the disruption resulting from COVID-19 has shown, not everything can be reasonably anticipated, and the doctrines of impossibility and frustration of purpose are alternatives that a business may consider if a force majeure clause is not available in a contract.
The coronavirus pandemic is a (hopefully) once-in-a-lifetime event, but it will still not affect all contracts, as courts tend to be narrow in their application of force majeure. Every contract or agreement should be carefully reviewed to understand how the coronavirus pandemic applies, and state law should be consulted in each case.
If you believe that you are a party to a contract that cannot be performed for reasons outside of your control, please contact us, we can help.
Being proactive in response to a crisis often avoids the worst outcomes.
- Covid 19 (Coronavirus), Bankruptcy Relief and Contracts
- Coronavirus Aid, Relief, and Economic Security (Cares) Act Programs for Small Businesses
- Erickson v. Dart Oil & Gas Corp., 189 Mich. App. 679, 688, 474 N.W.2d 150, 155 (1991)
- Edington v. Creek Oil Co., 213 Mont. 112, 117, 690 P.2d 970, 973 (1984)
- Woods v. Ratliff, 407 So. 2d 1375, 1376 (La. Ct. App. 1981)
- Flathead-Michigan I, LLC v. Penninsula Dev., LLC, No. 09-14043, 2011 U.S. Dist. LEXIS 27045, at *9 (E.D. Mich. Mar. 16, 2011)
- In re Old Carco LLC, 452 B.R. 100, 119 (S.D.N.Y. 2011)
- Great Lakes Gas Transmission Ltd. P’ship v. Essar Steel Minn., LLC, 871 F. Supp. 2d 843, 853 (D. Minn. 2012)
- Kyocera Corp. v. Hemlock Semiconductor, LLC, 313 Mich. App. 437, 449, 886 N.W.2d 445, 453 (2015)
- ANR Pipeline Co. v. Devon Energy Corp., Case No. G86-1123 CA, 1989 U.S. Dist. LEXIS 17684 (W.D. Mich. Feb. 1, 1989)
- Int’l Minerals & Chem. Corp. v. Llano, Inc., 770 F.2d 879, 887 (10th Cir. 1985)
- Cordoba v. City of Detroit, No. 221391, 2001 Mich. App. LEXIS 2597, at *8 (Ct. App. Sep. 4, 2001)
- Klapp v. United Ins. Grp. Agency, Inc., 468 Mich. 459, 469, 663 N.W.2d 447, 454 (2003)
- Auto-Owners Ins. Co. v. Campbell-Durocher Grp. Painting & Gen. Contracting, LLC, 322 Mich. App. 218, 225, 911 N.W.2d 493, 498 (2017)
- Molnar v. Molnar, 110 Mich. App. 622, 626, 313 N.W.2d 171, 173 (1981)