Our previous blog post discussed SBA disaster loans and companies needing to consider a capital infusion to stay afloat during the Covid-19 pandemic. But what about cancelling contracts or being excused from performing contractual obligations? This question is answered by determining whether nonperformance was contemplated in a “force majeure” provision, or if the coronavirus affected the parties’ obligations such that they truly cannot perform and whether the parties made their best efforts to mitigate the lack of performance. A “force majeure” provision has been historically unnoticed and drafted in a boilerplate fashion, but Covid-19 has thrusted it to the center stage and requires tenants, landlords, and their attorneys to pay special attention to the provision’s specific language.
A “force majeure” clause essentially frees or excuses both parties from performance because an event or condition specified by the clause occurred that was beyond their control. Common examples include natural disasters, embargoes, explosions, riots, wars, acts of terrorism, or government orders, restrictions, or “acts of God.” Neither party can be at fault for these events, so a force majeure provision protects both parties if an unlikely, unforeseeable event occurs. If a party can enforce a force majeure provision, they are excused from performance and liability under the contract.
A California court has stated that “[f]orce majeure is not necessarily limited to the equivalent of an act of God, but the test is whether under the particular circumstances there was such an insuperable interference occurring without the parties’ intervention as could not have been prevented by prudence, diligence and care.” Horsemen’s Benevolent & Protective Assn. v. Valley Racing Assn. (1992) 4 Cal.App.4th 1538, 1564-65. In that case, a party argued that the California Horse Racing Board reduced the prize money for a horse race long after the contract was signed and, because of this, the party was excused from performing under the contract. The court found the argument without merit because “[a] force majeure clause interpreted to excuse the buyer from the consequences of the risk he expressly assumed would nullify a central term of the contract.” Id. at 1565. In other words, it was not enough to want to be excused from performance or be unhappy with the contractual agreement years after it was signed—instead, there must be an unforeseeable event that requires performance to be truly impossible.
Because force majeure situations are so infrequent the language of these contractual provisions are often overlooked. As a result, many contracts drafted prior to 2020 do not include language covering the Covid-19 pandemic. Indeed, to deal with liquidated damages issues and related concerns in the real estate context, the California Association of Realtors developed new forms ostensibly to address Covid-19 as a “force majeure” event, as discussed in our prior blog post. Outside of contract for a sale of real property, it may seem fair for you to not be required to perform your obligations due to the Covid-19 pandemic, especially due to state and local ordinances and restrictions. But you may not be excused from performance unless your contract includes force majeure language sufficient to cover an unforeseeable global pandemic.
The Precise Wording of the Force Majeure Provision is Paramount
The first step of this inquiry requires a contractual analysis: does your contract have language that triggers the force majeure provision? Because a force majeure clause is a defense, the types of events that may allow a party to be excused from performance must be specifically discussed in the language of force majeure provision. In other words, if you believe an unexpected event should allow you to be excused from your contractual obligations, that very event or occurrence should be expressly stated in the force majeure provision.
For example, what if you recently leased commercial property to open a hair salon, barbershop, gym or exercise/workout facility, and now you must close down? If a state or local order or directive precludes your business from operating, you cannot assume your landlord will not require you to pay rent. Your obligations under the lease likely include the payment of rent, usually on a monthly basis, and being excused from performance due to the government-imposed shutdown may not trigger a “force majeure” event. To the same extent, if the precise wording of your contract excludes the tenants’ obligation to pay rent (which is common), you may not have any excuse from paying rent no matter the language of the government-imposed shutdown.
Force majeure provisions commonly include language such as “government restrictions, government regulations, government controls,” or a catch-all such as “or other causes (other than financial) beyond the reasonable control of either party.” But these boilerplate provisions may not support a party’s attempt to argue that the Covid-19 pandemic excuses their performance under a force majeure argument. If the force majeure clause does not include precise wording, the party seeking to be excused must look into other defenses such as “impracticability” or “frustration of purpose”—each of which requires a high burden by the party seeking to be excused from performance and, depending on the circumstances, still require a party’s performance after the impracticability or frustration ends. These are separate legal doctrines worth analyzing if your contract does not have adequate language in its force majeure provision.
Looking to the future, parties renegotiating these contracts would be wise to include terms such as “epidemic,” “pandemic,” and include other issues that have arisen from the spread of Covid-19, such as stay-at-home and related executive orders, shelter-in-place orders, government shutdowns, business closures, travel bans and advisories, interruption in air travel or out-of-state travel, restrictions or prohibitions on short-term rentals, hotels, and lodging, and interruptions caused by quarantines.
Parties Must Use Best Efforts to Mitigate Their Failure to Perform
A party relying on a force majeure clause to excuse performance must prove that the event was beyond their control and without fault or negligence. Besides showing that the risk of nonperformance was unforeseeable, parties must also show they attempted to mitigate, or could not have mitigated, the risk of nonperformance.
California law requires parties to demonstrate that they made sufficient or reasonable efforts to avoid the consequences of the force majeure event. This includes finding other means of performance from external suppliers or providers. As one specific example, a drilling company was not excused from its contractual obligations when it could not obtain tools due to its suppliers’ company being on strike. Interestingly, a “strike” was expressly enumerated in the force majeure clause. The court acknowledged the specific language but still ruled against the drilling company and found that it should have obtained the tools from an alternative source—even though this caused the drilling company additional expense. See Butler v. Nepple (1960) 54 Cal.2d 589, 599. Thus, simply because a party negotiated specific language in the force majeure provision does not automatically equate to a court excusing its performance.
This shows that companies should be affirmatively talking with the other parties about operational impacts and how to avoid any disruptions. The parties may suspend certain events for a period of time to prohibit the Covid-19 outbreak from accidentally spreading to any new locality. It may not be possible to hold a racing, sporting, or musical event in the next few months, so rescheduling the event must be discussed. This is directly applicable to summer concerts or weekly events in local parks and beaches in and around Truckee and the Lake Tahoe area, including larger athletic events such as running, biking, and related races or fundraisers. A court will scrutinize each party’s efforts and attempts to mitigate any risk if litigation ensues over the enforceability of a force majeure provision. Thus, being proactive and reasonable, and effectively communicating with your counterparties, suppliers, and customers may not only facilitate solutions outside of cancelling a contract, but could be the factual predicate for a court to excuse any nonperformance if attempts to mitigate the problems were reasonable but unsuccessful.
Whether the Covid-19 pandemic can serve as a basis to excuse nonperformance under a contract is determined on a case-by-case basis under specific contractual language. If you are negotiating or entering into a contract, lease, or similar agreement, consult an attorney to discuss force majeure protections related to Covid-19 and other unforeseeable events. If the agreement is already in place, businesses should review their specific contracts to determine whether a force majeure clause may apply to their situation.
Force majeure clauses will be interpreted under the applicable law in each jurisdiction. In California, Governor Newsom’s executive orders and the California Department of Public Health’s Regional Stay at Home Order have severely restricted business operations and travel, which may provide an excuse for a parties’ performance depending the language of an applicable force majeure provision. But each contract and the circumstances surrounding the parties’ business relationship are different. The parties’ actions (or lack thereof) could be dispositive to a court’s decision to excuse performance. What is certain is that not wanting to proceed with a contract due to unfortunate financial constraints or overall global economic concerns will not excuse a party from performing their contractual obligations under the concept of force majeure.
Ethan Birnberg is licensed in California, Nevada, Colorado, and Wyoming. He regularly assists clients with all types of asset sales, acquisitions, and real estate issues, including landlord/tenant matters, lease formation and construction issues, and HOA disputes. He holds dual certifications as a business bankruptcy and consumer bankruptcy specialist from the American Board of Certification, and has extensive insolvency experience assisting entities seeking to restructure under chapter 11 of the U.S. Bankruptcy Code, borrowers and lenders seeking out-of-court workouts, representing chapter 7 trustees, and advising directors, officers, and executive management regarding fiduciary duties and corporate governance issues. He can be reached at firstname.lastname@example.org.
The content contained and opinions expressed in this blog are solely those of the author. This blog contains content and opinions concerning the law generally, and is not intended to constitute legal advice or to create any attorney‑client relationship with the reader. The reader should consult with an attorney about any specific legal issues prior to embarking on any course of action or inaction involving legal matters. The author makes no claims, promises or guarantees about the accuracy, completeness, or adequacy of the contents of this blog and expressly disclaims liability for any errors and omissions.
 There are other legal doctrines not addressed in this article that may also provide avenues for a party to be excused from performing contractual obligations. Under California law, performance of a contract is excused by the doctrines of impossibility or impracticability when an unforeseeable event that is outside of the parties’ control renders performance impossible or impractical. See Citizens of Humanity, LLC v. Caitac Int’l, Inc., No. B215233, 2010 WL 3007771 (Cal. Ct. App. Aug. 2, 2010). The frustration of purpose doctrine may be invoked where performance is not impossible but, due to the significant change in circumstances, a basic assumption in the parties’ agreement has not materialized. Similar to force majeure provisions, certain circumstances preclude application of the frustration of purpose doctrine (such as a construction contract when the services were already provided by a party).