3-23-20 Client Alert - How Does COVID-19 Affect My Contracts?

WOODS OVIATT GILMAN LLP CORONAVIRUS (COVID-19) CLIENT ALERT

CLIENT ALERT: HOW DOES COVID-19 AFFECT MY CONTRACTS?

What happens if I can’t perform under my contract because of COVID-19?

COVID-19 has upended business in Rochester, NY, and across the world. After securing the immediate health and safety of their work force, many of our clients are calling us with the same question: “What if my business can’t perform under its contracts?” Or, the alternative: “My customers are calling me asking for relief under their contracts: What should I tell them?” Sometimes, we get both questions at once.

Generally, under contract law, if you don’t fulfill your contractual obligations, you will be liable for damages to the other party. That said, there may be circumstances that would excuse the performance under

the contract. Many contracts contain a provision to deal with unanticipated and uncontrollable risks, the force majeure clause. Even if your contract doesn’t contain such a provision, or you cannot invoke it, under the law there are some circumstances under which you may be able to be excused from that performance obligation without liability.

What is a force majeure clause?

Force majeure means “a superior or irresistible force.[i]” A force majeure clause is a contractual provision that alters the requirements of the contract if an uncontrollable and unplanned event occurs that frustrate the purpose of the contract. These clauses can adjust the burden of one or both parties when the event occurs. The clause typically: (i) defines the force majeure event, (ii) specifies the obligations of the parties in event that the force majeure event occurs, and (iii) states the conditions for invoking the clause. Force majeure clauses can define the force majeure event very specifically through listing a series of events that often fall into categories such as: (i) natural disasters (tornados, hurricanes, earthquakes, or other “acts of God[ii]”), (ii) regulatory events (change in law or governmental regulations), or (iii) other disasters (war, terrorism), or much more generally, such as “events beyond the reasonable control of the parties.” After SARS, more specific clauses may include “pandemic” or “epidemic,” but this is not common. Often, financial performance obligations (such as making payments) are excluded from the force majeure provisions. Because parties are free to allocate risk in their contracts, the language varies widely from contract to contract.

Is COVID-19 a force majeure event?

Depending on how the clause is written, it might be. The clause may be written in a manner that would encompass the results of COVID 19. Pandemics and epidemics may be among the items specifically listed in the list of triggering events. In the case of COVID-19, the emergency regulations issued as a response to COVID-19 may more likely be the triggering event for the force majeure clause.

The laws of individual states can vary with respect to interpretation of force majeure clauses. Historically, NY courts have looked to the exact wording of the contract to determine what types of events are included, stating “When the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect, and scope of force majeure.” [iii]Generally, NY courts construe these clauses narrowly. In one commonly cited case, the court stated “Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party's performance will that party be excused.”[iv] Catchall phrases such as “or other similar causes beyond the control of such party” are likely going to be construed by the NY courts to be actions similar to the listed items.[v] Any catchall is likely to also be limited to events that neither party could foresee or guard against in the agreement.[vi] The burden is on the party seeking to excuse its performance to prove that the force majeure event clause is triggered.[vii]

If my contract has a force majeure clause that covers COVID-19, does that mean I don’t have to perform? What are my obligations then?

Your obligations will depend on the wording of the clause. Sometimes, these clauses require conditions to assert the clause. For example, your contract may require that the affected party give notification of the force majeure event to the other party within a certain time period. The result may also not be what you intend, for example, your clause may allow the non-breaching party to terminate the contract if the performance is not resolved within a certain time frame. It is very important that you know and meet the timing requirements of your contract, and that you understand the ramifications of invoking the force majeure clause. Also, it’s important to understand that even if your force majeure clause is triggered by COVID-19, and you wish to invoke the clause, you must still try to perform, and it is advisable to document the reasons why you cannot perform.[viii]

In addition, in general, you must be prepared to show that the force majeure event actually caused your inability to perform and that you could not overcome the obstacle to performance through reasonable, good faith diligent measures. Just because COVID-19 occurred, and it (or the regulations that ensued) may fall under a listed force majeure event in your contract, it probably won’t trigger the clause if you could still perform your obligations. “The purpose of a force majeure clause is to limit damages in a case where the reasonable expectation of the parties and the performance of the contract have been frustrated by circumstances beyond the control of the parties.”[ix]

What if I can comply with my contracts, but it’s really expensive to do so?

If the result of COVID 19 or the ensuing regulations make performance more expensive, but not impossible, you will be unlikely to succeed in invoking the force majeure provisions to excuse performance under the contract in NY, depending, of course, on the language of your contract. In general, financial hardship is unlikely to be sufficient to be a force majeure event[x][xi][xii]. Cases from the 2008 recession also indicate, that, generally, financial turmoil and the decisions that ensue from an economic downturn are not sufficient in and of themselves to be determined to be a force majeure event.[xiii]

What if I don’t have a Force Majeure clause, but It’s just plain impossible for me to perform?

There may be statutory provisions or common law principles could be available to you in connection with an unforeseeable event. For example, Section 2-615(a) under the UCC (which applies to the sale of goods) in NY may excuse performance if “performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any … governmental regulation or order ….[xiv]” In addition, there are several doctrines under the common law that may apply to your situation, including the doctrines of impossibility, impracticability, and frustration of purpose, and there may be other contract law principles that could apply, such as: anticipatory repudiation, failure of a condition, and later agreements between the parties. The doctrine of impossibility, for example, generally would excuse a contract where an unforeseeable and uncontrollable action makes it impossible to perform the contract as the parties intended it to be performed, but the doctrine is narrowly applied in NY. Under this doctrine, performance must be objectively impossible (not just expensive, unprofitable, or inconvenient) and the force majeure event must frustrate the actual performance of the contract (it’s not enough that the event just occurred)[xv]. For example, a contract to perform at a theater during the time period in which regulations prohibit the gathering of individuals could be determined to be impossible as the event could not be legally performed due to COVID-19 regulations.

These statutory and contractual doctrines and principles must be analyzed in the context of your contract to provide specific guidance on whether they would apply to your situation. For example, a contract could contain a “hell or high water” provision that mandates a payment even if the parties cannot perform for any reason, and the contractual provision would likely prevail.

What’s the bottom line?

A 20-30-minute call with one of our attorneys that practice in this area can help you begin to assess your basic rights and obligations. This will depend on your specific facts, including the provisions of your contract, and the governing law. You may want to, or need to, give notice promptly under your contract to avail yourself of the force majeure clause’s protection. If so, you must document the steps you are taking to try to comply. If a litigation ensues, these steps will be very important for the strength of your case. If you are entering into a new contract, you should specifically negotiate how you will deal with COVID-19 impacts as these are now foreseeable risks that should be allocated through contractual provisions.

It’s also important to remember that COVID-19 impacts everyone world-wide and your contracting counterparties are experiencing the same concerns. Amending contracts in a way that is mutually beneficial through a creative solution is always more efficient than litigation, and we are happy to assist.

[i] BLACK’S LAW DICTIONARY 445 (Abridged 6th Ed. 1991)

[ii] “Acts of God” is defined as something that happens by the direct, immediate, and exclusive operation of the forces of nature, uncontrolled and uninfluenced by the power of man, and without human intervention, as if such character that it could not have been prevented or escaped from by any amount of foresight or prudence, or by any reasonable degree of care or diligence, or by the aid of any appliances which the situation of the party might reasonably require him to use” BLACK’S LAW DICTIONARY 445 (Abridged 6th Ed. 1991).

[iii] Constellation Energy Srvs. Of NY, Inc. .v. New Water St. Corp, 46 N.Y.S. 3d 25, 27 (2017)(citing Route 6 Outparcels, LLC v Ruby Tuesday, Inc., 88 AD3d 1224, 1225, 931 NYS2d 436 [3d Dept 2011])

[iv] Kel Kim Corp. v. Central Markets, Inc. 70 N.Y.2d 900, 902-903(1987).

[v] See Kel Kim supra note iv at 903 “The principle of interpretation applicable to such clauses is that the general words are not to be given expansive meaning; they are confined to things of the same kind or nature as the particular matters mentioned (see, 18 Williston, Contracts § 1968, at 209 [3d ed1978]).”

[vi] See In re Cablevision Consumer Litig., 864 F. Supp. 2d 258, 264, (2012).

[vii] See John E. Murray, Jr. and Timothy Murray, Corbin on Contracts Desk Edition §74.4 (Matthew Bender 2019)

[viii] See Castor Petroleum Ltd. V. Petroterminal De Panama, S.A. 2012 N.Y. Misc. LEXIS 6503*5-8 2012 NY Slip Op 33533(U) 5-8. “The party claiming a force majeure event of a governmental restraint must demonstrate its bona fide efforts to dissolve the restraint that prevents the performance of its contractual duties.”

[ix] United Equities Co, v, First Nat’l City Bank, 383 N.Y.S.2d6,9 (1976) citing 3A Corbin, Contracts § 642.

[x] See John E. Murray, Jr. and Timothy Murray, Corbin on Contracts Desk Edition §74.13 (Matthew Bender 2019) 3

[xi] See Macalloy Corp. v. Metallurg, Inc., 728 N.Y.S.2d 14, 14-15 (2001), “Plaintiff shut down its plant voluntarily due to financial considerations brought about by environmental regulations. Those are not circumstances constituting a force majeure event, and financial hardship is not grounds for avoiding performance under a contract.”

[xii] See also Route 6 Outparcels, LLC v. Ruby Tuesday, Inc. 910 N.Y.S.2d 408, 408(2011) “Courts generally are reluctant to excuse contractual non-performance based on claims of economic hardship and changing economic conditions (see Millers Cove Energy co. v. Moore (In re Millers Cove Energy Co.) 62 f.3d 155[6th Cir. Tenn. 1995] and the cases cited infra)”

[xiii] See Route 6 Outparcels, LLC, supra note xiii at 408 “”defendant failed to raise a triable issue of fact with respect to its defense that non-performance under the Lease was excused pursuant to the force majeure clause based on changing economic conditions”.

[xiv] NY UCC § 2-615(a).

[xv] See Kel Kim, supra note iv at 385 “Impossibility excuses a party's performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.”

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COVID-19 Multidisciplinary Crisis Group Co-Leaders