Contractual Defenses – The Force Majeure Clause Steps Up
Richard Roth, Esq –
21st April 2020
The Coronavirus has created a “new normal.” All across the United States, quarantine-in-place orders have been issued, along with emergency legislation to restrict non-essential business from operating in over 30 states.[1] As businesses, sports and commerce continue to be restricted, fulfilling contractual obligations have become a major issue. Many wonder how this global pandemic will impact one’s ability to fully perform under a contract, and what kind of litigation we can expect to see over the inability to complete contractual obligations.
Worldwide pandemics, like the Coronavirus, can seldom be predicted when contracts are written up between parties. Random, unpredictable events are things that have been taken into consideration within the transactional and legal world through a principle known as “force majeure.” A French term that literally translates to “superior force,” a force majeure is a common boiler-plate style clause that rarely gets much attention when placed into contracts.[2] Force majeure clauses are routinely placed in a plethora of contracts and have the power to “excuse or deter” performance under the contract when events occur that are completely out of control of the parties.[3] Specifically, “a force majeure event is an event beyond the control of the parties that prevents performance under a contract and may excuse nonperformance.”[4] Many times, these events have been labeled as “acts of God” that would otherwise be impossible for the contracting parties to predict and prepare for.[5]
Although force majeure clauses are seen in contracts across various business and transactional settings, the actual enforcement and interpretation of the clauses are not so black and white. In New York, the enforceability of a force majeure clause will depend on its precise wording and express terms.[6] There is no bright-line rule for force majeure clauses in New York – it all depends on the language used in the clause itself.[7] As this memo will discuss, boiler-plate language might not be enough to carry the day in court if you find yourself in force majeure related litigation as a result of the Coronavirus.
New York courts interpret force majeure clauses very narrowly.[8] In Phibro Energy, Inc. v. Empresa De Polimeros De Sines Sarl, the Court held that the force majeure clause was too ambiguous to find in favor of the defendant where the defendant claimed they were unable to deliver the contracted chemicals on time because of a mechanical failure at the processing plant where the chemicals were made.[9] The Court reasoned that “a force majeure clause must include the specific event that is claimed to have prevented performance” and since the clause was susceptible to more than interpretation as to how to deal with delayed shipment, summary judgment was not granted.[10] On the other hand, in Constellation Energy Services of N.Y., Inc. v. New Water St. Corp., the Court denied defendant’s motion to dismiss because the force majeure was specific enough to protect defendant from being unable to supply the necessary energy contracted for, as a result of the damage from Hurricane Sandy.[11] The Court reasoned that the force majeure clause was specific enough to protect the defendant because “[w]hen the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect and scope of force majeure.”[12]
When events occur that are not specifically mentioned in a force majeure clause, the doctrine of ejusdem generis applies.[13] The doctrine is seen as “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.”[14] In Team Marketing USA Corp. v. Power Pact, LLC, the Court held that the cancellation of the Toyota car sale promotion schedule, due to economic reasons, did not fall within either the specific events of the force majeure clause, nor did it fall into the broader view of the clause.[15] The Court reasoned that the force majeure clause in this case covered things such as riots, boycotts and acts of God, but the mere cancellation of the events, due to economic interests, were not covered under a more expansive reading of the clause.[16]
Since courts analyze force majeure clauses so closely, it is important to examine how and if force majeure clauses include provisions that excuse performance based on global health pandemics. A study was undertaken by a company called “Kira Systems” to look into Chinese companies and their force majeure clauses in relation to the emerging Coronavirus outbreak. The study found that out of 130 contracts examined, 94 of them had force majeure clauses included somewhere in the contract.[17] Of those contracts with force majeure clauses, only 13 of them had specific language which expressly excused performance for “flu, epidemic, serious illness or plagues, diseases or outbreak.”[18] In addition, of the 94 contracts with force majeure clauses, only 41 had language which excused performance for acts of government, such as quarantine-in-place measures or restriction of essential-business-only operations.[19] Although this is only a small fraction of the millions of contracts out there in the business world, these numbers start to paint a picture of the likely issues facing many contracts: they don’t have language in their force majeure clauses that specifically deal with global health emergencies and pandemics.
Although dated, a place that courts might look for guidance on interpretation of force majeure clauses during a global health pandemic is case law that emerged after the Spanish Flu in the early 20th century. In Citrus Soap Co. v. Peet Bros. Mfg. Co., the Court ruled that the plaintiff was not entitled to damages for the delay in soap shipment because the defendants gave adequate notice to the plaintiffs, in accordance with the force majeure clause, that they would be unable to perform the delivery of the soap, due to the quarantine in place order placed by the city of San Diego, because of the Spanish Flu.[20]
After the Spanish Influenza, there was significant litigation across the United States brought on by teachers who went unpaid during the government mandated closing of schools. In Montgomery v. Board of Education of Liberty Tp., Union County, the Court held that absent language in a contract that outlined how teacher’s salaries would be withheld during school closure due to unforeseen circumstances, like influenza, the school district was obligated to pay the teachers for the time the schools were closed.[21] The Court explained the rule, stating,
It is quite generally held that no deduction can be made from the salary of a teacher in the public schools for the time the school is closed by reason of contagious disease, where the teacher remains ready to continue his duties under this contract of employment, unless there is a stipulation in the contract of employment covering such possible occurrence.[22]
Although the Court makes no mention of a “force majeure” clause in the teacher’s contract, it gives us valuable insight into how Courts will narrowly analyze contracts and will not mandate any kind of performance that is not explicitly written into the contract itself.
Given all this information, where does that leave force majeure clauses in the wake of Coronavirus? Since there is no bright-line rule for force majeure litigation, cases will likely be decided on a case-by-case basis. The sympathy of New York Courts to excuse performance could fall anywhere on a sliding scale. On one side, Courts could excuse performance, regardless of how the force majeure clause is worded, given how widespread and profound the virus has affected people and businesses. On the other hand, Courts might only be sympathetic to those parties that specifically contracted for health and global pandemic events in their force majeure clauses.
Based on the past precedent of force majeure jurisprudence and analysis, it is likely that New York Courts will continue their strict interpretation of force majeure clauses. If the cases from the Spanish Influenza teach us anything, it is that courts will read the contract “as is.” If there is a force majeure clause in the contract that specifically excuses performance for global health pandemics, then the defendant will prevail. If there is no such language, then the Court will interpret it as such and not excuse performance.
Further, Courts might spell out the importance of drafting force majeure clauses that cover world health pandemics for future contracts. With instances of world-wide health crises constantly springing up, such as the H1N1 Swine Flu scare, the Ebola outbreak and regular instances of flu-related contagion, courts might take this opportunity to highlight the vital importance of parties to include these events in their force majeure clauses. As the ABA Journal warned in 2005, “[t]he next great flu outbreak is likely to be a lot worse than [H1N1], scientists fear. And they say it could be right around the corner.”[23] Courts may take this position when it comes to analyzing force majeure clauses, as the might criticize the legal world for not taking adequate precautions over the past few years to combat against the threat of “acts of God” and global health pandemics.
(Assisted by Samuel Hines)
[1] Erin Schumaker, Here are the states that have shut down nonessential businesses, ABC News (Mar. 26, 2020), https://abcnews.go.com/Health/states-shut-essential-businesses-map/story?id=69770806.
[2] Daniel Marcus, Force majeure: The Lasting Fight in the Wake of Coronavirus, Forbes (Mar. 23, 2020), https://www.forbes.com/sites/danielmarcus/2020/03/23/force-majeure-the-lasting-fight-in-the-wake-of-coronavirus/#523e51a2775a.
[3] Edward Tillinghast, Force majeure Clauses and COVID-19 – Can Force majeure Clauses Excuse Performance Under New York or Delaware Law in a Pandemic?, National Law Review (Mar. 13, 2020), https://www.natlawreview.com/article/force-majeure-clauses-and-covid-19-can-force-majeure-clauses-excuse-performance.
[4] Beardslee v. Inflection Energy, LLC, 25 N.Y.3d 150, 154 (N.Y. 2015).
[5] See supra note 4.
[6] See supra note 4.
[7] See supra note 4.
[8] Reade v. Stoneybrook Realty, LLC, 63 A.D.3d 433, 434 (1st Dept. 2009) (“Interpretation of force majeure clauses is to be narrowly construed and ‘only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused”); see also Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902-01 (N.Y. 1987) (“Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party’s performance will that party be excused”).
[9] Phibro Energy, Inc. v, Empresa De Polimeros De Sines Sarl, 720 F.Supp. 312 (S.D.N.Y. 1989).
[10] Id. at 318.
[11] Constellation Energy Services of New York, Inc. v. New Water Street Corp., 146 A.D.3d 557 (1st Dept. 2017).
[12] Id. at 558.
[13] Team Marketing USA Corp. v. Power Pact, LLC, 41 A.D.3d 939, 942-43 (3rd Dept. 2007).
[14] Id.
[15] Id.
[16] Id. at 944.
[17] Jennifer Tsai, Kira Study: February 2020, Kira Systems (Feb. 2020), https://kirasystems.com/files/guides-studies/KiraSystems-Deal_Points_Force_Majeure_Coronavirus.pdf.
[18] Id.
[19] Id.
[20] Citrus Soap Co. v. Peet Bros. Mfg. Co., 50 Cal.App. 246 (Ca. Dist. Ct. App. 1920).
[21] Montgomery v. Board of Education of Liberty Tp., Union County, 131 N.E. 497 (Oh. 1921)
[22] Id. at 498.; see also Phelps v. School Dist. No. 109, Wayne County, 134 N.E. 312, 313 (Ill. 1922) (holding that absent express terms in the contract stating that school district was relieved from duty to pay teachers during unforeseen school closure, the school district must pay teachers for the period of time the schools were closed).
[23] Kristin Choo, The Avian Flu Time Bomb, ABA Law Journal (Nov. 29, 2005), https://www.abajournal.com/ magazine/article/the_avian_flu_time_bomb.
