United States: Force Majeure In California: Does The COVID-19 Pandemic Qualify? Part 3 – Practical Guidance

Practical Guidance for Addressing Force Majeure in the COVID-19 Pandemic

Parties on both sides of a contract must weigh their options when faced with a force majeure event and should take steps to ensure that they have a clear understanding as to their obligations, the claims being made by the other contracting party, and what steps they can take to mitigate their losses and/or protect their rights.

There are a number of steps a party can and should take to limit any potential liability in the midst of the current COVD-19 Pandemic.

Review the Terms of Your Contract

First, review the specific terms of your contract. Parties may contract around certain risks that might otherwise be viewed as a force majeure event. You will need to know what your obligations are under the contract and whether you, or the other contracting party, will still be expected to perform even in the face of these unprecedented circumstances. For example, a contract may include specific provisions that a strike or national emergency does not relieve a party of its obligations under the contract.

In addition if your contract includes a provision that changes in supply or an economic downturn will not excuse performance then the current pandemic may well be insufficient to excuse performance. Similarly, neither party will be able to claim an inability to perform due to risks inherent in the nature of the contract.¹

If your contract does contain a force majeure clause, particularly where a pandemic is specifically mentioned, then you may well be able to cancel the contract without penalty or liability. A typical force majeure clause might read as follows: "The parties' performance under this Agreement is subject to acts of God, war, government regulation, terrorism, disaster, strikes (except those involving [a party's] employees or agents), civil disorder, curtailment of transportation facilities, or any other emergency beyond the parties' control, making it inadvisable, illegal, or impossible to perform their obligations under this Agreement. Either party may cancel this Agreement for any one or more of such reasons upon written notice to the other."² If your contract contains such a clause, you will still need to determine whether the current COVID-19 Pandemic falls within one of the identified triggering events.

Evaluate Viability of Performance and Clearly Articulate Claim of Impossibility

Many companies and individuals are facing new and unprecedented challenges during the COVID-19 Pandemic. Not all of these challenges will excuse a party from performing its contractual obligations. If you are considering claiming impossibility of performance by reason of "force majeure" ensure that that you are not doing so based on an inherent, foreseeable or avoidable risk. You should also take steps to avoid any delays, disruptions, etc. that are within your control. These steps should be well-documented and saved for your records.

In addition, evaluate the timeliness of your claim. If performance is not due for several months it may be too early to claim impossibility. Similarly, if you are able to continue performing under your contract, you should assume that you are obligated to do so. As discussed above, a party will not be able to escape its obligations simply because performance is more expensive and/or more difficult than anticipated.

If you intend to claim impossibility of performance as a result of force majeure, you should clearly articulate this to the other contracting party. The decision to claim performance is impossible should be carefully weighed bearing in mind that the contracting party may choose to treat your actions as an anticipatory breach and could file suit right away.³

How to Address Claims that a Party Cannot Perform Its Contractual Obligations

If you are on the other side of a party claiming an inability to perform as a result of a force majeure you have several options. First, clarify whether the party is claiming it will be unable to perform, or whether its performance will simply be delayed or reduced. For example, if a party contacts you merely to inform you that it intends to honor its contractual obligations but is running behind schedule due to the COVID-19 Pandemic this may be insufficient to constitute anticipatory breach.

If the party unequivocally expresses that it will be unable to perform its contractual obligations then you must decide whether to treat this as an anticipatory breach and terminate the contract or employ a "wait and see" approach until performance is due.⁴ One advantage of terminating the contract is that it will relieve you of your obligations under the contract.⁵ On the other hand, terminating the contract will place an affirmative duty on you to mitigate your losses.⁶ In addition, terminating the contract will eliminate the possibility of performance from the other party down the road. If, for example, a party originally thought performance was not possible, but suddenly realizes that they will be able to fulfill their contractual obligations they can withdraw their repudiation and perform as agreed. If the contract is terminated, there will be no reason or obligation to perform even if it becomes possible.

Even if a party does not invoke force majeure as their reason for not performing now, they will likely do so as a defense to a claim of breach of contract action in the future. Although the burden will be on the opposing party to demonstrate that their performance is impossible, evidence that performance was in fact possible will be of use to you.⁷ Consider, for example, reaching out to other companies or individuals, if any, that are continuing to provide services. Similarly, if the contracting party is continuing to provide some services, or services to other individuals may be used to demonstrate claims of impossibility of performance are unfounded.

Regardless of what decision you make, you should take steps to mitigate your losses. These steps should be well-documented as should any losses.

Conclusion

In this unprecedented time, it is important to review your contracts thoroughly and to evaluate all of your options carefully. Review the specific terms of your contracts, including any specific force majeure provisions and/or conditions or risks that you may have inherently agreed to accept given the nature of the contract. Only take action after you have completed a full analysis of your contract and the particular set of circumstance you are facing.

See Part 1 - What Constitutes a Force Majeure

See Part 2 - Asserting Force Majeure

See Part 3 - Practical Guidance

Footnotes

1. See, e.g., Citizens of Humanity LLC, No. B214232, 2010 WL 3007771 (Cal.Ct.App. Aug. 3, 2010); Horsemen's Benevolent & Protective Ass'n, 4 Cal.App.4th 1538; California Bio-Mass, No. E037065, 2006 WL 2949565 (Cal.Ct.App. Oct. 17, 2006).

2. § 77:31.Force Majeure clauses, 30 Williston on Contracts § 77:31 (4th ed.)

3. Relentless Air Racing, LLC, No. 2D CIVIL B237191, 2013 WL 1191832, (Cal. Ct. App. Mar. 25, 2013).

4. Id.

5. Warner Brothers Pictures Inc., 197 Cal.App.2d 331.

6. See, e.g., Jegen v. Berger, 77 Cal.App.2d 1, 11 (1946).

7. See, e.g., Sorbo, No. B205936, 2009 WL 931688, at *4 -5 (Cal. Ct. App. Apr. 8, 2009).

Originally published 7 May, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.