The COVID-19 pandemic is causing significant disruption to businesses across the United States and around the world. One of the major issues confronting businesses, is how the implementation of public health orders and other remedial measures to address COVID-19 is threatening, impacting, and possibly prohibiting businesses from complying with their contractual obligations. For instance, some companies have already asserted (or threatened) that the pandemic constitutes a force majeure event or gives rise to other legal bases excusing performance.
In California, the defense of force majeure does not depend on being expressed in a contract. It is available by statute, California Civil Code § 1511. However, no California case has been found where force majeure was asserted based on an epidemic or pandemic. For companies that are considering issuing a force majeure notice, or those anticipating that their contractual counterparties may do so, the following is a summary of the force majeure defense under California law.
Contractual Force Majeure
Most commercial contracts contain some variation of a force majeure clause. Force majeure clauses define circumstances beyond the parties’ control that can render contractual performance too difficult or even impossible. Where an event (or series of events) triggers a force majeure clause, the party invoking the clause may suspend, defer, or be released from its duties to perform without liability. Indeed, contract language may expressly excuse performance for force majeure or acts of God, including enumerated circumstances such as epidemics.
Force majeure clauses in commercial contracts typically provide a list of specific events outside of the contracting parties’ control that, upon occurrence, would excuse or delay the invoking party’s performance, or permit the cancellation of the contract. Events like war, terrorist attacks, famine, earthquakes, floods, strikes, fire, epidemics, and government action are typically included as force majeure events excusing performance. Some force majeure clauses also include catch-all language broadly excusing performance based on significant events outside the parties’ control.
Generally, a force majeure clause is triggered when the occurrence of a force majeure event, sometimes referred to as an “act of God,” ultimately renders performance so impracticable that it is excused. Notably, the term “force majeure” is technically broader and more comprehensive than the term “act of God” because a force majeure, unlike an act of God, can originate in human agency just as readily as it can originate in a natural force (e.g., war, terrorism, workers’ strike, or quarantine), and courts similarly recognize that the doctrine of impossibility does not require a showing of actual or literal impossibility of performance, but only a showing of commercial impracticability. See Seaboard Lumber Co. v. U.S., 308 F. 3d 1283, 1294 (Fed. Cir. 2002).
Thus, in considering the possibility of a defense based on an epidemic or pandemic such as COVID-19, one should analyze the applicable contract language. It may provide a broader defense than what is otherwise available by statute. A force majeure clause is always interpreted to only apply to events beyond the parties’ control, whether or not that is expressly stated. Beyond those rules of interpretation, other consequences depend on the precise wording of the clause. While the language of force majeure clauses varies widely, here is a typical example:
Force Majeure. Neither party hereto shall be liable for any failure of performance due to causes beyond its reasonable control, the occurrence of which could not have been prevented by the exercise of due diligence, such as Acts of God, acts of civil or military authority, earthquakes, fires, floods, epidemics, windstorms, explosions, natural disasters, sabotage, wars, riots, changes in laws, regulations, tariffs mandated or approved by federal, state or other governmental or regulatory entities, or court injunction or order; provided that written notice of such delay (including the anticipated duration of the delay) shall be given by the affected party to the other party as soon as possible after the event or occurrence (but in no event more than 30 days thereafter).
Moreover, many contracts require that a party seeking to assert force majeure as a basis for suspending or terminating performance must provide notice to its counterparty. Failure to timely send such notice may result in waiver or have other adverse consequences. For contracts involving the sale of goods, the Uniform Commercial Code requires that the party in receipt of a force majeure notice respond within thirty days, or the contract will lapse with respect to any affected deliveries. See, e.g., Cal. Com. Code § 2616.
In addition, California law requires that parties invoking force majeure demonstrate that they made “sufficient” or “reasonable” efforts to avoid the consequences of the force majeure event, such as by providing cover or sourcing means of performance from external providers. California courts have found, for example, that force majeure does not excuse a drilling company from its contractual obligations where the company could not obtain necessary tools because its supplier was on strike. Although strikes were among the force majeure events enumerated in the clause, the court found the company was obliged to source the tools from an alternate supplier, even though doing so would cause the company to incur additional expense.
Lastly, for the COVID-19 outbreak to constitute a force majeure event, the ongoing pandemic must be the proximate cause of nonperformance. See Hong Kong Islands Line Am. S.A. v. Distribution Servs. Ltd., 795 F. Supp. 983, 989 (C.D. Cal. 1991), aff’d, 963 F. 2d 378 (9th Cir. 1992).
California courts have not ruled on the applicability of force majeure provisions with regard to a plague or epidemic such as COVID-19. Applying the principles discussed above, however, a court would likely determine that the coronavirus outbreak and its subsequent effects were neither foreseeable nor within the parties’ control. Consequently, application of a force majeure clause would likely hinge on whether the coronavirus has rendered performance of a contract actually impossible or impracticable.
Statutory Force Majeure
Even if a contract does not contain a force majeure clause, the defense is still available by statute. “No [one] is responsible for that which no [one] can control.” Cal. Civ. Code § 3526. From this statutory and common-sense maxim flows the defense of force majeure, which is codified as follows:
The want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate:
- When such performance or offer is prevented or delayed by the act of the creditor, or by the operation of law, even though there may have been a stipulation that this shall not be an excuse; however, the parties may expressly require in a contract that the party relying on the provisions of this paragraph give written notice to the other party or parties, within a reasonable time after the occurrence of the event excusing performance, of an intention to claim an extension of time or of an intention to bring suit or of any other similar or related intent, provided the requirement of such notice is reasonable and just; [or]
- When it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary; . . .
Cal. Civ. Code § 1511 (emphasis added). Essentially, force majeure falls in two categories: operation of law and irresistible, superhuman cause. There are compelling arguments that both categories apply to COVID-19.
The government (Federal and California) have now issued several orders in an effort to contain COVID-19 that may directly impact companies’ abilities to meet their contractual obligations. For instance, California issued an order for “all individuals living in the State of California to stay home or at their place of residence, except as needed to maintain continuity of operation of the federal critical infrastructure sectors, critical government services, schools, childcare, and construction, including housing construction” (Executive Department, State of California, Executive Order N-33-20). This is in addition to prior orders and “recommendations” for closure of bars, nightclubs, restaurants other than take-out, houses of worship, and other gatherings of 10 or more people. California Governor Gavin Newsom issued an executive order that authorizes local governments to halt evictions for renters, homeowners, and commercial tenants, slows foreclosures, and protects against utility shutoffs for Californians affected by COVID-19 (Executive Department, State of California, Executive Order N-28-20).
It is foreseeable these and other governmental actions may be alleged to impede performance of some contracts. Whether they excuse performance depends on the extent and nature of the impairment. “[A]n action for breach of contract does not lie when its performance is prevented by operation of law.” Nat’l Pavements Corp. v. Hutchinson Co., 132 Cal. App. 235, 238 (1933) (citing Cal. Civ. Code § 1511, subcontractor excused from performance to general contractor when city lawfully cancelled the general contractor’s contract). “[T]here is no liability for breach of a contract whose performance has been made impossible by operation of law.” Baird v. Wendt Enters., Inc., 248 Cal. App. 2d 52, 55 (1967) (buyer under real estate purchase contract that depended on building permit excused from purchase when permit expired and could not be renewed). “A party is not required to violate the law to avoid liability for breach of contract.” Bright v. Bechtel Petroleum, Inc., 780 F. 2d 766, 772 (9th Cir. 1986).
Some cases hold mere difficulty or delay in performance due to governmental activity, as distinguished from a complete bar to performance, may not be enough to constitute the defense of force majeure. See Lloyd v. Murphy, 25 Cal. 2d 48, 55 (1944) (no defense of operation of law by car dealership because sale of automobiles was not made impossible or illegal by governmental wartime action but merely restricted); Dorn v. Goetz, 85 Cal. App. 2d 407, 416 (1948) (sale of real property was not prevented by operation of law but merely delayed). “[L]aws or other governmental acts that make performance unprofitable or more difficult or expensive do not excuse the duty to perform a contractual obligation.” Lloyd v. Murphy, supra, 25 Cal. 2d at 55.
The “operation of law” category has the best chance of success if performance has been entirely prevented, in whole or in part. It is a closer call if performance is only delayed. The defense is weakest and may not suffice if performance is still possible but merely made more expensive or unprofitable.
COVID-19 may also satisfy the second “force majeure” category – “irresistible, superhuman cause.” “Force majeure” is not necessarily limited to the equivalent of an act of God. The test is whether under the particular circumstances there was such an insuperable interference occurring without the party’s intervention as could not have been prevented by the exercise of prudence, diligence and care.” Pac. Vegetable Oil Corp. v. C. S. T., Ltd., 29 Cal. 2d 228, 238 (1946).
Similar to contractual force majeure clauses, Section 1511(1) also requires “written notice to the other party or parties, within a reasonable time after the occurrence of the event.” While the COVID-19 pandemic is in some ways a slow-moving event, a party who determines they will not be able to perform under their contract due to a governmental order must provide written notice to their contractual counterparty within a reasonable time to qualify for relief. What will be a reasonable time will differ depending on the identity of the parties, the nature of the performance, and the reason for the delay.
Doctrine of Frustration of Purpose
In addition to force majeure, the doctrine of “frustration of purpose” may be an additional defense. Unlike contractual force majeure clauses and California Civil Code section 1511, each of which is a defense to be raised to excuse non-performance, the doctrine of “frustration of purpose” is available as a defense where contractual performance remains possible but has become valueless. This defense to contract enforcement applies when performance is not impossible or impracticable, but has become pointless—i.e., the main purpose of a contract has become frustrated. See Dorn v. Goetz, 85 Cal. App. 2d 407, 411 (1948) (quoting Williston, § 288). A party’s inability to pay alone, even if unexpected, will not be sufficient to invoke a frustration defense. Likewise, an increased cost to perform the contract may not be sufficient. To be successful in asserting a frustration defense, the purpose or ‘desired object’ of both parties must have been frustrated. In other words, the total or near-total destruction of the purpose for which, in the contemplation of both parties, the transaction was entered into must be shown. Id. (emphasis in original).
Whether COVID-19 rises to the level of a force majeure event under California law will largely depend on the language of the applicable contract, the nature and scope of the effect on a party’s ability to perform its obligations under the contract, and the steps the invoking party took to avoid the negative consequences of the virus.
Regardless of whether COVID-19 constitutes a force majeure event, the best practice may be to reach out to your partners, vendors, manufacturers, suppliers, and contractual counterparties prior to the date performance is due, to attempt to negotiate necessary adjustments to performance and to diffuse potential disputes.