Keisha O. Coleman, Andrew F. Gann, Jr., and Abram J. Pafford, McGuireWoods LLP
Unless you’ve been living under a rock, you know that most of us feel like we’re, well, living under a rock. COVID-19 has forced the cancellation of countless events and activities, and many individuals and businesses have been unable to perform all sorts of contractual obligations—everything from concerts to conferences to contracts for the supply of widgets. And speaking of widgets, we lawyers have now been shaken out of our home offices and transported back to first-year contracts class, when most of us still remembered what a “force majeure” is.
Force Majeure, Impossibility, and Frustration of Purpose
Here’s a basic refresher: A “force majeure” or “impossibility” clause excuses contractual performance when it is impossible or impracticable, typically because of an extraordinary event that the parties couldn’t have anticipated or controlled.
When invocation of a force majeure clause results in litigation, courts, as always, focus heavily on the precise language of the clause and typically consider whether the event was: (1) unforeseeable; (2) outside the party’s control; (3) the sole cause of non-performance; and (4) unable to be avoided with due care. Some force majeure/impossibility clauses specifically reference “quarantine” and “epidemic,” which should make the analysis more straightforward. But others use more general terms like “acts of God,” “natural disasters,” or “acts of government,” leaving more room for interpretation as to whether social-distancing measures, travel restrictions, and the like excuse performance.
Application to the COVID-19 Pandemic
COVID-19 has already led to many new lawsuits, including:
- ACE Universe Inc. v. GrowTix LLC et al. – Comic Con founders sued a ticket processor over the cancellation of a Comic Con event scheduled for March. Comic Con’s founders allege they invoked the force majeure clause in their agreement with the ticket processor but the ticket processor has refused to reimburse fans.
- Omar Khan et al. v. Cinemex USA Real Estate Holdings, Inc. et al.– A Texas cinema owner sued a Mexican cinema company for allegedly using the coronavirus pandemic as a pretext for walking away from agreements to purchase the cinema. Because the parties entered into the purchase agreements on March 10, plaintiff argues the pandemic’s impact wasn’t unforeseen and was explicitly discussed during negotiations.
- NetOne, Inc. v. Kona Surf Partners, LLC – The sponsor of a March golf event at a Hawaiian hotel invoked an impossibility clause in its contract with the hotel and cancelled the event. The event sponsor alleges the hotel refuses to return the deposit.
Undoubtedly, we are just now seeing the start of this wave, with a considerable surge of litigation coming. Suits are likely to arise out of everything from cancelled real-estate transactions, to the unraveling of planned mergers, to the inability of manufacturers to keep up with supply-contract requirements, to coveted private schools forcing parents to keep paying full freight while school is out or suffer losing their child’s spot.
Although it remains to be seen how these lawsuits will play out, courts will analyze the particular contractual language at issue and will also consider the underlying circumstances. For instance, courts are going to be looking at when the contract was formed (before or in the midst of the pandemic); when performance was expected to occur (this Spring or not until the Summer or Fall); whether something more than mere financial strain precipitated by the economic downturn is causing the inability to perform; whether a modification could have addressed the issue; and whether the terminating party provided proper notice.
So this is a time for examining contracts closely and considering how the pandemic is already impacting performance or may cause problems later on. In some instances, immediate termination may be necessary. In others, it may be better for both parties to try to reach an agreement on a modification that stops short of complete termination followed by potential litigation.
Regardless, parties should craft any communications regarding potential termination/modification extremely carefully, keeping in mind that if litigation ensues, the court will probably be reading the communications many months or even years from now, when the stress of the current situation has receded. Establishing and memorializing a defensible, reasonable position now is critical.
Keisha O. Coleman, Andrew F. Gann, Jr., and Abram J. Pafford are all with McGuireWoods LLP