At the time of this article, the COVID-19 pandemic has spread to over 190 countries and all U.S. states. By some estimates, the virus could reduce global economic growth by up to 2.0% per month if current conditions persist, and global trade could fall by 13% to 32%, depending on the depth and extent of the global economic downturn. Although the full catastrophic impact of COVID-19 will not be known until the effects of the pandemic peak, one thing is certain — over the past month virtually every lawyer in the country has fielded a call from a client asking if force majeure can be used to get out of a contractual obligation. This is a trap for the unwary lawyer, who will almost certainly be tempted to, perhaps reflexively, answer “yes” to the question. Yet, in most instances, the correct answer is “no.”
IS COVID-19 FORCE MAJEURE? PROBABLY NOT
In legal circles, force majeure has been the hottest topic since the outbreak of the pandemic. Not only that, but a phenomenon has emerged: for the past four weeks or so, a misconception has spread like wildfire among lawyers from coast to coast that force majeure is a general panacea that enables clients to dodge contractual obligations during this time of unprecedented crisis. Good lawyers, however, should know better.
At its core, a force majeure event is an unforeseen or unavoidable event beyond the reasonable control of the parties to an agreement that excuses (either temporarily or permanently, depending on the facts and circumstances) a party’s performance of its obligations under the agreement. Virtually all courts construe force majeure clauses narrowly, and to invoke such a clause a party almost always must show that its performance has been rendered impossible (not merely costly, impractical or a hardship – but literally impossible) as a result of the claimed force majeure event.
Lawyers advising clients on force majeure during the pandemic all too often not only fail to consider this standard of proof, but also that the vast majority of force majeure clauses consist of boilerplate verbiage most courts consider to be far too broad to be enforceable. Perhaps the most notorious example of such legally ineffective boilerplate is the proverbial “act of God.” Of course, anything can be viewed as an “act of God.” Courts therefore generally consider such clauses to be legally meaningless, illusory and unenforceable. Woe to the lawyer who goes into court with nothing better to say than: “COVID-19 is an act of God.”
Force majeure clauses containing an enumerated list of force majeure “events” typically fare better in terms of judicial enforceability than their boilerplate brethren. However, for the most part, such clauses are unlikely to be legally effective in the context of the COVID-19 pandemic. Indeed, when such an enumerated list is present in a force majeure clause, courts typically confine the force majeure events solely to those events that the list contains, and exclude all other events. How many force majeure clauses are out there that list “pandemic” as a force majeure event? Not many.
Simply put, in most circumstances, the argument that COVID-19 is a force majeure event is unlikely to survive a legal challenge in court under the current state of the law. Whether legislation emerges in the aftermath of the pandemic requiring courts to effectively treat COVID-19 just as force majeure events are treated, or whether courts ultimately “carve out” COVID-19 as an exception to prevailing legal precedent on the subject remains to be seen. However, such possibilities should not serve as a guiding principle in providing legal advice to clients on the topic.
“FORCE MAJEURE” VERSUS “FRUSTRATION”
Not to be confused with force majeure is the entirely separate doctrine of “frustration of the purpose.” This doctrine refers to a situation where an unforeseen event has occurred, which, in the context of the entire transaction, destroys the underlying reasons for performing the contract. Unlike a force majeure situation where a party must show that performance is impossible, the “frustration” doctrine may only be invoked where performance is possible but the circumstances that comprised the foundation of the contract no longer exist. In this sense, force majeure is irreconcilable with “frustration.”
Nevertheless, the two doctrines are legally similar in certain respects. As with force majeure, courts apply the “frustration of purpose” doctrine narrowly — the claimed frustrated purpose must be so completely the basis of the contract that, as both parties understood it, without it, the transaction would have made little sense. The time the contract was entered into is the critical point at which the court must examine the parties’ intentions when examining a “frustration” defense to the performance of a contractual obligation. Long-established legal precedent holds that changes in market conditions or economic hardship do not excuse performance. Nor does a reduction in the profitability of a transaction support a frustration of purpose defense. For these reasons, the “frustration” doctrine is, as a general matter, likely to fare no better than force majeure in the context of the COVID-19 pandemic.
Catastrophic beyond words as it is, any attempt to use force majeure to dodge contractual obligations as a result of the COVID-19 pandemic is generally going to be an uphill legal battle. On the flip side, a party opposing a force majeure defense may have a good leg to stand on legally, but doing so certainly may not be the equitable or “right” thing to do depending on the facts and circumstances. Conflict between both sides during the crisis on this score is likely to sour relations between contracting parties, who then won’t want to contract with each other anymore down the road. This outcome is likely to result in even more economic harm to both sides when the pandemic ends and things return to “normal.”
Therefore, compromise is an alternative to legal action that lawyers should heavily consider, now during the COVID-19 pandemic more than ever, in advising clients with regard to their contractual obligations during the crisis. For example, rather than advising a client to refuse to pay rent on the ground of force majeure, consider advising a client to compromise by offering to pay reduced rent now, and to make-up the difference with interest later. Such a compromise preserves the landlord-tenant relationship into the future, long after the pandemic concludes. Both sides must give up something now as part of the compromise, but each side stands to gain more from each other in the future, not to mention avoiding the attorneys’ fees and business disruption that comes with litigation.
As a general matter, lawyers should focus on crafting creative legal compromises to the financial challenges their clients are facing during this unprecedented time, rather than reflexively jumping on the force majeure bandwagon. Such compromises have the benefit of preserving relationships between contracting parties — relationships which might otherwise be irreparably shattered as a result of the economic pressures both sides are facing due to the crisis. If a compromise can be reached, it will usually be more cost-effective for all sides in the long run than invoking force majeure to dodge contractual obligations in the short run.