By Caitlin Phair and Patrick O’brien
More than a year and a half has passed since COVID brought the world’s economy to a screeching halt. Despite how much time has elapsed, we are likely just beginning to see some of the lasting impacts that the pandemic will have on businesses around the world.
I don’t need to tell you that the transportation industry in particular took a drastic hit, with the US Travel Association reporting an unprecedented 42 percent decline in travel spending in 2020 compared to 2019. And with the collapse of international travel—according to the World Tourism Organization international tourist arrivals declined globally by 73 percent in 2020, with 1 billion fewer travelers compared to 2019—the virus was more than a disruption to transportation providers.
You may have heard the term “force majeure” used regularly during the previous year when many special events such as weddings, proms, or corporate outings were cancelled or pushed out indefinitely. While the introduction of the vaccinations has brought glimpses of “normalcy” and many companies are seeing a surge in business, with the emergence of new variants (Delta being the most common in the news lately), it appears that COVID is here to stay, and companies must continue to adapt to ever evolving industry safety standards.
This is where force majeure clauses and their common law relatives, the doctrines of impossibility and frustration of purpose, can be your best weapon. As such, one must consider how best to tackle ever-evolving challenges, including but not limited to, disruptions in supply and distribution chains, insufficient labor to meet operational needs, and even the complete inability to perform under the terms of a contract.
What is a force majeure clause?
Generally, once a party to a contract has made a promise to perform, it must fulfill its promise even where unforeseen circumstances, such as an “act of God,” make performance burdensome, difficult, or extremely more expensive than anticipated. The purpose of a force majeure clause is to carve out exceptions to this general principle, and excuse performance under a contract when certain specified conditions arise. It provides contracting parties with a defense against liability if they are unable to fulfill their contractual obligations due to events that are out of their control and that the parties could not foresee at the time they entered into a contractual agreement.
While many equate force majeure with only excusing “acts of God,” such as extreme weather events (tornadoes, hurricanes, earthquakes, etc.), it can also extend to impossibilities caused by human acts as well. Human acts versus acts of God can include governmental actions, acts of war, economic downturn, and terrorism. Some cases where this has been challenged include Mathes v. City of Long Beach (1953) 121 Cal.App.2d 473; see also Emelianenko v. Affliction Clothing No. 09-07865 MMM (MLGx), 2011 U.S. Dist. LEXIS 165598 (C.D. Cal. July 28, 2011).
In California, the test for whether performance can be excused due to a force majeure event is whether under the particular circumstances there was such an insurmountable interference, without the parties’ intervention, that could not have been prevented by prudence, diligence, and due care.
How do you enforce a force majeure clause in California?
In order to invoke a force majeure clause in California, a party must show that in spite of skill, diligence, and good faith on its part, performance became impossible or unreasonably expensive, and therefore should be excused. In addition, California law imposes a “good faith” requirement that the party invoking the defense did not cause the excusing event and took diligent and reasonable steps to ensure performance. Lastly, unless a contract explicitly identifies a qualifying event as force majeure, then the event must be unforeseeable at the time of contracting in order to qualify.
As such, a force majeure clause is not necessarily a Get Out of Jail Free card, and therefore, should be crafted carefully in order to ensure maximum protection.
How should you draft your force majeure clause?
As discussed above, a force majeure qualifying event can include acts of God or acts of man. In addition, clauses can also specify certain events, such as epidemics, pandemics, and quarantines. However, even if your current contractual language states that a pandemic is covered under force majeure, you still need to assess: (1) whether COVID was the cause of your delay or other unfulfilled obligation in the contract; and (2) whether COVID was an unforeseeable event at the time of making the contract.
If you currently do not have a force majeure clause in your standard business contracts, we would recommend not only adding a standard provision that incorporates “acts of God” such as extreme weather, but also identifying specific events like a pandemic or other event that may be specific to your industry. For example, a distributor may be impacted by a delay from a manufacturer because they did not receive a necessary part—which is currently a common issue as the supply chain continues to be impacted. In that case, a specific qualifying event could be failure or delay of manufacturer’s supplier of product.
What’s most important is that your force majeure language be clear and unambiguous in order to minimize disputes if you’re ever faced with having to invoke it.
Doctrines of Impossibility and Impracticability
If your current contract does not include any force majeure language, you may still be protected by the Uniform Commercial Code (UCC) or the common law doctrines of impossibility and impracticability. Under UCC § 2-615, a seller may not be in breach of his duty under a contract when there is a delay in delivery or non-delivery, if performance 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.
Under the doctrine of impossibility, performance is excused if it becomes impossible or impractical due to extreme and unreasonable difficulty, expense, injury, or loss involved. Whereas the doctrine of impracticability excuses the performance that becomes impractical due to excessive and unreasonable expense, it does not include mere difficult, unusual, or unexpected expense.
In the event that your contract does not include a force majeure clause and you are unable to find reasonable alternatives, it is important that you try and communicate with the other party about your delay in performance. We would also recommend that you try not to use absolute language in your notice, such as “we cannot perform,” in order to avoid potential anticipatory breach issues.
In sum, force majeure clauses can be an important tool when trying to combat challenges that have arisen due to COVID and should be incorporated into your standard contracts. When adding this type of clause make sure the qualifying event language is clear and unambiguous and try to incorporate specific events that are common to your field of business. [CD1121]
Disclaimer: The foregoing is provided solely as general information, is not intended as legal advice, and may not be applicable within your jurisdiction or to your specific situation. You are advised to consult with your attorneys for guidance before relying upon any of the information presented herein.
Caitlin Phair is an associate with O’Brien & associates in Petaluma, California. She can be reached at caitlin@pobrienlaw.com. Patrick O’brien is a managing partner at the law firm O’Brien & associates. He can be reached at patrick@pobrienlaw.com.