Will Financial Impacts from COVID-19 Pandemic Suffice to Breach a Contract Under a Force Majeure Clause?

Force majeure clauses in contracts are intended to allow performing parties to avoid liability if certain natural or unavoidable events or catastrophes interrupt the expected course of events and impact the parties’ ability to perform.

Contractual force majeure clauses generally have three to four components that (i) excuse one or both parties from performing under the contract if a qualifying or specified force majeure event occurs, (ii) list specific or categories of qualifying force majeure events, (iii) require the impacted party to conduct certain actions such as mitigate damages, and (iv) provide a remedy for the impacted party, such as the right to terminate the agreement or seek performance from others during the term of the force majeure event.

The COVID-19 pandemic will likely raise novel legal arguments in the context of impracticability, frustration of purpose, or force majeure clauses because there are so many ripple-effect consequences outside of the human health implications—government shut-downs, cancelled flights, quarantines, and shuttered borders, to name but a few—that were not considered at the time of contracting, but that will directly and indirectly impact whether or not parties to contracts can perform their agreed-to obligations.

Guidance can be found in the case law that was created in response to the tragedies of September 11. For example, in the case of OWBR LLC v. Clear Channel Communications, Inc. in the US District Court of Hawaii (266 F.Supp.2d 1214, February 5, 2003), the operator of the Outrigger Wailea Resort sued Clear Channel Communications and SFX Multimedia Group for pulling out of hosting an event called Power Jam in February 2002 at the resort, which had held over 2,000 rooms for the event. Defendants claimed that the events of September 11, coupled with the fragile condition of the U.S. and international consumer economies, had resulted in the withdrawal of commitments from multiple sponsors and participants, severely disrupted travel, decimated the tourism industry, and created a pervasive sense of fear that gripped the country. Defendants felt that these factors made holding the event “inadvisable,” justifying their pulling the plug under the language of the contract’s force majeure clause. The resort disagreed and claimed that the events of September 11 did not make it “inadvisable” to travel to or to hold events in Hawaii five months after the terrorist attacks, and that the real reason the defendants cancelled the event was the economic downturn, which although due in part to September 11, was too attenuated from the events of September 11 to excuse performance under the agreement's force majeure clause. The court held for the plaintiff, explaining that a force majeure clause does not excuse performance for economic inadvisability, even when the economic conditions are the product of a force majeure event. Other courts have also held that economic hardship is not enough to trigger a force majeure provision. See Stand Energy, 760 N.E.2d at 458; Butler v. Nepple, 54 Cal.2d 589, 6 Cal.Rptr. 767, 354 P.2d 239, 244–45 (1960).

But, the story does not end there, because economic conditions are not always disqualified to trigger a force majeure clause. Ultimately, it is a matter of degree because there are cases in which courts have held that the economics of an agreement can play a role when they alter the essential nature of the performance or make it completely unjust to hold the parties to their agreement. See Publicker Indus. v. Union Carbide Corp., 17 UCC Rep. Serv. 989 (E.D.Pa.1975).

In summary, parties seeking to avoid their obligations under agreements they entered into before the COVID-19 pandemic must carefully evaluate the factors that lead to their inability or inadvisability to perform. The more closely tied those factors are to the impacts of the pandemic, the more likely arguments of force majeure will successfully allow parties to wash their hands of the deal.

For more information on force majeure, see our recent articles here and here.