Kang Haggerty News
Many businesses have now turned to the force majeure clauses present in their contracts—invoking the idea that the COVID-19 pandemic is an unforeseeable “act of God” that has hindered the ability of parties to perform their duties as agreed.
In the May 14, 2020 edition of The Legal Intelligencer Edward T. Kang, managing member of Kang Haggerty wrote “Force Majeure During a Pandemic and Potential Contractual Disputes”
In light of the ongoing COVID-19 pandemic, businesses and individuals alike have struggled with following through on contracts that were agreed upon long before the novel coronavirus was even discovered, let alone foreseen as the cause of a worldwide health crisis. Many have now turned to the force majeure clauses present in their contracts—invoking the idea that the COVID-19 pandemic is an unforeseeable “act of God” that has hindered the ability of parties to perform their duties as agreed. For those who do not have such clauses present in their contracts, can the same concept be invoked in a court of law?
I note that even those who have force majeure clauses written into their contracts have faced an uphill battle in their exercise of the clauses. There has been a real debate over whether the circumstances generated by the coronavirus qualify as “acts of God” or are otherwise covered by force majeure clauses. In many situations, “disease”—which could be construed as including epidemics, pandemics, and so on—may not be explicitly included in the force majeure clause. To that end, many businesses have found out recently that their business interruption insurance explicitly excludes pandemics as a covered event, a relic from the early 2000s SARS outbreak. Even if disease is not clearly included, however, courts would be likely to interpret a “catch-all” type clause (e.g., language such as “but not limited to”) to also include pandemics. In a similar vein, acts of government can also be included in force majeure clauses, making certain government acts, such as the business closures we have seen nationwide, also a potential hindrance to the performance of contracts. Of course, those who argue that COVID-19 does not constitute an act of God are on the side trying to enforce the contracts—e.g., hotels that took deposits from consumers and are refusing to refund the deposits despite the travel restrictions due to the pandemic making the planned travels impossible.
But, there may still be some hope for those who do not have force majeure provisions in their contracts or whose clause is otherwise extremely narrowly constructed. An analysis of the situation at hand and whether the common law concepts of impracticability or frustration of purpose apply could be fruitful. Although similar concepts, the two are not the same. Impracticability is the idea that if a basic assumption underlying a contract becomes no longer applicable, the contract can be voided. Frustration of purpose, on the other hand, is a situation where the contract could be performed but there is no longer a point in doing so due to some sort of unforeseen event. In other words, impracticability focuses on the ability to do something spelled out in a contract, but frustration of purpose focuses on the reasoning for entering the contract in the first place.
In normal circumstances, courts are not often generous in their application of these concepts. Usually, they will carefully examine the contract at hand and see if there are any relevant and thus applicable provisions therein, including clauses that allocate risk between the parties. The courts want to make sure that a party is not trying to find an excuse for non-performance.
During this ongoing pandemic, it is difficult to predict how courts will react to disputes arising from the nonperformance of contractual duties due to circumstances surrounding COVID-19. There are many factors at play, especially when considering the disparity between various states’ guidelines and their respective approaches to the virus. Parties may be more willing to compromise if each is located in a state with strict stay-at-home orders and prolonged business shutdowns—they both may be facing a lack of ability to perform their contractual duties. But, if one party is in a state where these restrictions have loosened up, it may be more difficult to come to an amenable settlement outside of a court of law.
Unsurprisingly, there is no case law related to force majeure, impracticability, or frustration of purpose in the context of a pandemic of this size that could provide legal guidance in the here and now. The last pandemic, the Spanish Flu of 1918, left very little case law behind, and what is left behind is somewhat contradictory. For example, in Phelps v. School District No. 109, Ill. 193 (1922), the Illinois Supreme Court held that an epidemic did not qualify as an “act of God” that would allow the school district to avoid its obligation of paying teachers who were willing and able to teach, but could not do so due to mandated school closures. The court explained that since both parties were fully aware that the state could, theoretically, shut down the school district due to an epidemic, the school district could have easily inserted language in the employment agreement, which would have removed their liability to pay the teachers in such a situation.
On the other hand, the North Dakota Supreme Court in Sandry v. Brooklyn School District No. 78, 15 A.L.R 719 (1921) stated that it was lawful for a school district not to pay a bus driver whose ability to drive students to and from school was impeded by closures due to influenza. The court, here, made a distinction between teachers and drivers by agreeing that teachers should continue being paid in such a situation, but bus drivers should not. This interesting opinion hinged on the qualifications of the two professions—teachers were thought of as professionals that forewent other employment opportunities to travel to the school for work, but bus drivers were locals and required less job training. In other words, the bus driver faced much less inconvenience than teachers in such a situation. But, perhaps most relevant to us now, the court also stated that the school closure was a direct consequence of an “act of God,” which prevented full performance of a contract—in this case, the issuance of payroll to the drivers.
In Pennsylvania, a recent decision from the Supreme Court may provide some insight into how the COVID-19 pandemic will be construed by courts elsewhere throughout the nation. In a ruling delivering on April 13, in Friends of Danny DeVito v. Wolf, the court dismissed contentions by that Gov. Tom Wolf did not have the authority to issue the March 19 executive order, which closed the physical operations of nonlife-sustaining businesses in order to hinder the spread of the coronavirus. Petitioners argued that the pandemic is not a “natural disaster” as explained in the Emergency Management Services Code (see 35 Pa.C.S. Section 7101-79a31; Sections 532(a) and 1404(a) of the Administrative Code, 71 P.S. Section 532; 71 P.S. § 1403(a); and the Disease Prevention and Control Law (the Disease Act), 35 P.S. Section 521.1-521.25). Respondents countered that the ongoing pandemic “unquestionably” fits the definition of a disaster and the “other catastrophe” language enumerated in the Emergency Management Services Code.
The court agreed with respondents, stating that the explicitly enumerated disasters listed in the Emergency Management Services Code—such as tornados, hurricanes, explosions and earthquakes—do not all share a common cause, and such the “other catastrophe” language can be interpreted more broadly than petitioners would have liked. Considering the large number of people affected by the virus, its death rate, and its exponential growth, the court agreed that it was very well within the governor’s power to issue such an executive order to mitigate the effects of the coronavirus. The court’s full opinion can be read here.
Although it is, of course, not a nationwide binding decision, the court’s decision could certainly have an impact on disputes within Pennsylvania courts, which invoke the coronavirus as a disaster event. This is especially relevant for disputes that invoke force majeure clauses or the related common law concepts of impracticability and frustration of purpose.
Ultimately, the courts will firstly look at the language present in the contract to see if and how unexpected events and disasters are accounted for. What is written in the contract will likely override other arguments, if such provisions exist. It is important that if you believe it necessary to invoke force majeure, impracticability, or frustration of purpose as a reason for nonperformance, that you communicate clearly with the other party to firstly find an alternative resolution to the issue—this may even be a contractual obligation to invoke force majeure eventually. Sometimes, courts also find that force majeure is not an excuse for total nonperformance, and it should be invoked, if possible, only for the postponement of obligations. You may find it in your favor to agree to perform contractual obligations at a later point in time, if amenable to the other party, and this goes both ways. Courts may not look kindly upon a party who refuses to grant an extension to the performance of a contract and deem it as unreasonable behavior, considering the widespread effects of coronavirus on the mandated closures of many businesses.
Of course, there are some situations where extensions are clearly impossible to grant, as well. A discussion with legal counsel may be extremely fruitful, as they can advise you on a proper course of action and how to best handle legal issues like these in such challenging and uncharted territory.
Edward T. Kang is the managing member of Kang Haggerty LLC. He devotes the majority of his practice to business litigation and other litigation involving business entities. Contact him at ekang@khflaw.com.
Reprinted with permission from the May 14, 2020 edition of “The Legal Intelligencer” © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.