Although the freedom of contract provides parties with broad discretion in defining the scope of a force majeure clause, in general, a force majeure clause is a contractual provision that excuses the nonperformance of contractual obligations in circumstances beyond a party’s control and that render performance impossible, commercially impracticable, or inadvisable. In evaluating the impact of a force majeure clause on the rights and duties under a particular contract, a business should consider the availability and scope of force majeure as a defense under the governing law and the provisions of the contract. Force majeure clauses are commonly drafted to include a series of agreed-upon events excusing nonperformance, such as natural disasters, restrictive governmental laws or regulations, and acts of god. Without a force majeure clause, parties may only be able to rely on the doctrines of impracticability, impossibility, and/or frustration of purpose, which are rarely accepted by courts as grounds for excusing performance.
Consider the doctrine of impossibility as applied in the context of a contract for the sale of goods during the COVID-19 pandemic: at the beginning of the COVID-19 outbreak, a manufacturer enters a valid contract for the sale of 5 million non-specialized widgets to a supplier in exchange for $70 million. Under the contract, the widgets must be delivered on a certain date and time is of the essence. Shortly after the manufacturer enters the contract, in response to a rapid spread of COVID-19, a government order is issued, whereby the manufacturer’s employees are prohibited from occupying the manufacturer’s manufacturing facility. As of the date delivery is due, the manufacturer’s employees are still barred from entering its facility. Can the manufacturer claim impossibility of performance as a defense?
Although performance may seem impossible, courts likely will not find performance impossible if the widgets can be manufactured or acquired elsewhere, even if the cost of performance would be tripled by so doing. Consequently, impossibility of performance will not likely be a viable defense for the manufacturer. Note, however, that in the context of a contract for the sale of goods, courts may nevertheless find performance impossible, as a practical matter, when costs “marked[ly] rise” because of an “unforeseen contingency” that “alters the essential nature of the performance.” See UCC § 4-2-615, Cmt. 4. Applying Comment 4 in the example above, the manufacturer’s nonperformance may be excused if the manufacturer can show that: (1) issuance of the order was an unforeseeable contingency and (2) all alternative means of manufacturing or acquiring the widgets would (a) alter the essential nature of timely transferring and delivering the widgets to the supplier and (b) markedly raise the cost of so doing. Showing a lack of foreseeability may be challenging if similar orders had been issued elsewhere before the parties entered the contract, and given that the widgets are not specialized, a large number of alternative means for manufacturing or otherwise acquiring the widgets might be available, each of which would have to be shown to alter the essential nature of timely transferring and delivering the widgets. Even after showing a lack of foreseeability and sufficient alteration with respect to each alternative, the manufacturer would still need to show that each alternative markedly raised the cost of performance. “Marked” appears to be a substantial threshold to satisfy. In Mineral Park Land Co. v. Howard, for instance, a court found that granting relief to a promisor on the basis of impossibility was proper where the cost of performance increased “ten or twelve times” as much as the usual cost. 172 Cal. 289, 156 P. 458 (Cal. 1916). Following this opinion, even if the cost of timely transferring and delivering the widgets was tripled by manufacturing or acquiring them elsewhere, the rise in cost would not likely be “marked,” and the manufacturer’s failure to transfer and deliver the widgets would, thus, not likely be excused on the basis of being impossible as a practical matter.
Historically, with respect to the doctrine of impossibility, Arkansas law does not appear to be more forgiving in the context of service contracts. In Johnson v. Bryant, the Supreme Court of Arkansas held that the cost of complying with a contract “cannot excuse a party from performing an absolute and unqualified undertaking” where so performing is “possible and lawful.” 61 Ark. 312, 32 S.W. 1081 (1895). But what if a service provider’s supplier is forced to cease operations pursuant to an Arkansas government order issued in response to COVID-19, whereupon the service provider was lawfully left with only the options of (1) acquiring essential equipment elsewhere or (2) failing to perform services he is contractually obliged to perform? Strictly adhering to Johnson, whenever the service provider’s undertaking to provide his services becomes “absolute and unqualified,” the service provider’s nonperformance of the services will be inexcusable if performing the services was possible and lawful. Hence, if the equipment essential for performing the services could lawfully be acquired elsewhere, the service provider seemingly must acquire the equipment elsewhere to avoid breaching the contract. What if acquiring the equipment elsewhere increases the costs by a minimum of $500,000.00? At this point, the service provider might want to consider calling a contract attorney to go over his options.
Next, consider the doctrine of frustration of purpose as applied in the context of COVID-19: a person rents a room to view a popular holiday parade, and subsequently, a government order issued in response to COVID-19 causes the parade to be cancelled. Under the doctrine of frustration of purpose, in general, a contracting party’s duty of performance is discharged where the purpose of the contract has been destroyed because of a supervening, unforeseen event not the fault of the party seeking discharge. The defense of frustration of purpose, thus, appears useful to the renter in this example; indeed, the purpose for which the room was rented (viewing the parade) was destroyed by a supervening event (the government order in response to COVID-19) for which the renter was not at fault. However, the foreseeability of the supervening event will be determined as of the time the contract was formed. This could be problematic for the renter depending on the time he or she booked the room.
Force majeure clauses are commonly used to avoid the foregoing issues with traditional doctrinal defenses, but these clauses also have shortcomings. Often, force majeure clauses are narrowly interpreted by courts such that they excuse performance only in the circumstances specifically listed in the clause or circumstances of the same kind or nature as those listed. Accordingly, businesses should evaluate contracts to identify any force majeure clause therein and consider consulting with an attorney to determine whether the COVID-19 pandemic gives rise to circumstances for which the force majeure clause will excuse nonperformance of any contractual obligation.
In fact, in the example above, the manufacturer’s failure to timely transfer and deliver the widgets might be excusable if the contract with the supplier contained a force majeure clause with sufficient breadth. Indeed, COVID-19 could reasonably be interpreted as an “act of god” or the government order could be reasonably be interpreted as sufficiently restrictive to excuse performance. Even if the manufacturer’s performance is excused only for a limited time, the manufacturer will have known in advance to consider alternative means for performing or contemplate strategies for efficiently restarting operations once the order is lifted.
This information is provided by Bailey & Company, Attorneys & Counselors, P.A. (“Bailey & Company”), solely for informational purposes. This information does not form, nor should it be construed to form, an attorney-client relationship, or any other fiduciary relationship, with Bailey & Company or any attorney, agent, or employee of Bailey & Company. For additional information about the topic of this article, contact Drew Bailey.