NOTE: First and foremost, we at RKF wish to remind all of our friends, families and clients to take the necessary and recommended precautions to stay healthy and safe during this time of health risk. The health of our families and friends must be considered and protected above and beyond economic issues.
Background
Due to the international spread of COVID-19 (Coronavirus), the U.S. Department of health and Human Services has recently declared a public health emergency. Many states, local governments, institutions, school districts, large scale spectator events and businesses have followed suit in recently instituting self-imposed closures and cancellations. From a business standpoint, the virus has imposed significant stress on the global supply chain, affecting many industries. With the additional and growing list of closures, the fallout is now impacting small, medium and large-scale businesses and institutions alike.
Due to the occurrence of such a potential (or actual) pandemic, it is necessary to review potential legal risk factors caused by the interruption or impacts and design a proactive approach to mitigate such risks. As with every business transaction, “Acts of God” or major events which are beyond the control of the parties may serve to prevent an impacted party from performing all or a portion of their contract obligations. In many commercial agreements, these “Acts of God” events are generally categorized as “Force Majeure” events, and specific contractual language is included. In cases where an agreement does not contain specific Force Majeure language, the common or statutory law of the applicable legal jurisdiction will apply, with most having some form of “excusability” under certain circumstances.
Today, many contractual parties are concerned about potential delays, defaults and/or difficulties in the performance of their contractual obligations - or are already dealing with these unforeseen impacts. Many companies are already anticipating or incurring impacts due to problems and delays arising from their suppliers, customers and joint venture partners. A quick analysis of the current risks as to the performance of contractual obligations is most-likely warranted, and the implementation of any proactive steps available to mitigate such risks is advisable.
Force Majeure clauses in California agreements
While Force Majeure clauses are commonly used in contracts to allocate the respective parties’ risks in a transaction, there is no standard or codified language and, in practice, commonly used terms can widely vary. In general, a force majeure clause seeks to excuse the performance of a party’s required contractual obligations where performance shortcomings stem from circumstances beyond the party’s control. In such cases, the extenuating circumstances addressed by the clause render such party’s required performance commercially impracticable or impossible.
In typical Force Majeure clauses, the parties typically negotiate specific language designed to remove uncertainty and allocate the risk of the specified force majeure events (i) regardless of foreseeability and/or preventability; or (ii) whether the event was the result of an “Act of God.” The specifically enumerated events can be drafted more broadly or very limited way as desired. The typical clauses can cover such items as governmental actions and/or human-caused events, and serve to excuse the impacted party’s performance during the Force Majeure event.
California law as to Force Majeure where the contract is silent
As to a dispute arising from a party’s impacted performance due to a potential Force Majeure event, a court will generally decide whether to excuse a party’s performance of its contractual obligations based on whether the event (i) is severe enough so as to rise to the level of a “Force Majeure event”, and (ii) impacts the Party’s performance in a foreseeable way. Such a decision will be made pursuant to the court’s understanding of the applicable statutory and common law, with “foreseeability” being a major factor.
California Commercial Code §2615(a). In relation to the sale of goods, California Commercial Code §2615(a) excuses a seller from timely delivery or for non-delivery of goods where its performance has become impracticable because of either:
Unforeseen supervening circumstances not within the contemplation of the parties at the time of contracting.
Compliance in good faith with an applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.
California Civil Code § 1511(2). Relating to non-sales of goods matters, California Civil Code § 1511(2) provides a basis for relief, albeit limited, pursuant to the doctrine of “frustration of purpose.” Generally, frustration of purpose or “impossibility (or “impracticability”) of performance” equates to a contractual situation wherein the performance of the contract no longer makes sense due to an intervening and unforeseeable event. The “frustration of purpose” code section must be analyzed in light of the existing caselaw which adds to the interpretation and implementation of this doctrine. California Civil Code § 1511(2) excuses a party, unless the parties have expressly agreed otherwise, when performance of an obligation is prevented or delayed by either:
An irresistible, superhuman cause.
An act of public enemies of California or the US.
The courts will generally combine the frustration of purposes and impracticability of performance categories to determine whether a Force Majeure event has occurred. For example, the court will consider whether the event has (i) made the performance obligations required under the contract impossible or impracticable to perform, or (ii) frustrated the main purpose of the contract to the extent that it makes little or no sense to continue performance of the contract.
Recommended Actions
Review your agreements and contractual obligations to determine (i) what performance obligations are at risk, and (ii) what the related terms of the applicable contract specifically state. Consider the effect of the event upon the performance obligations of your counter-party as well.
Determine whether the invocation of a Force Majeure clause may be necessary, and whether there are alternative options to effectuate performance of the obligations.
Monitor the situation, and determine the obligatory steps to be taken in order to invoke the Force Majeure clause.
Review the applicable insurance policies in effect, to determine whether and to what extent business interruption and/or other coverage may apply.
Establish and maintain detailed records relating to the interruption to your business, including information as to the factors leading to frustration of purpose and/or impracticability/impossibility. Monitor the anticipated or actual costs arising from the event, both as to your costs and those of your counterparty as well.
You may contact RKF attorneys to discuss Force Majeure issues and circumstances, as well as potential commercial litigation strategies.
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