Most commercial contracts have a force majeure clause. This little-used provision generally allows a party to escape their obligations under the agreement if performance under the agreement is stymied due to an “Act of God” or other unforeseeable event. During the coronavirus pandemic, many produce agreements have been terminated. But the pandemic is not a universal “get out of contract” card. It is anticipated that legal disputes will test the bounds of these clauses and boilerplate “Act of God” clauses will be supplemented with the now foreseeable pandemic as a force majeure event.
Pandemic: Force Majeur de Jure
The force majeure terms in many contracts are boilerplate and never contemplated a global catastrophe such as COVID-19, the disease that has killed more than 62,000 Americans as of this writing. Many companies have seen business come to a standstill as the result of state-imposed restrictions on travel and commerce that have made it near impossible to make good on their contractual obligations.
As restaurants, hotels, college dining halls and other meal providers have shuttered or scaled back purchases due to the coronavirus pandemic, growers and shippers who supply foodservice have gotten hammered as once lucrative produce contracts have been voided by buyers, who, in turn, have lost their customers. Industry meetings and trade shows have been cancelled due to government shutdown orders and travel bans.
But as with all agreements, we must look first to the contract language to determine if the force majeure clause will stick. A typical force majeure clause provides that performance under the agreement is excused if performance is prevented or delayed by any “Act of God” or “other cause beyond the reasonable control of the parties including, floods, storm, fire, strikes, war, interruption of power, or by any law or regulation.” But if the clause is too narrowly drafted, courts may construe the contract to excuse performance only if one of the specified conditions are satisfied.
The coronavirus pandemic has become a worldwide force majeure event. But it is not a given that the pandemic constitutes an “Act of God.” Courts will look to whether under the particular circumstances there was such an insurmountable obstacle occurring without the party’s intervention as could not have been prevented by exercising reasonable diligence and care. However, a business may be allowed to continue to operate during the outbreak, and not be completely shut down, making it more difficult for the business to be excused from the contract. And mere financial difficulties, without more, may not be enough to rely on the force majeure provisions.
Contracts are often drafted in a way to make it near impossible to terminate due to unforeseen circumstances. Typical force majeure language will provide that a party may be excused if performance is rendered “impossible” due to some specified event. If that specific event doesn’t occur, or if the event happens, but does not render performance “impossible,” but merely impracticable, the promisor may be held to the terms of the contract.
A Western Growers member called me to say he understood when his restaurant customer invoked the force majeure clause to reduce the quantity of produce purchased by 60 percent due to the government order compelling restaurants to serve meals by take out or drive-through only. The restaurant could show it was doing 60 percent less business, year over year. However, when another restaurant customer attempted to jettison their contract because the chef decided to change the menu offerings, the member held the customer to the contract and pursued his PACA trust rights to collect what was owed.
Even if a contract lacks, or a has a weak, force-majeure clause, the promisor can often seek relief under the common-law doctrines of “impossibility” or “frustration of purpose,” which allows a party to be excused of its contractual obligations if unforeseen circumstances makes the agreement impossible or impracticable to carry out.
Courts have held that just because a party has experienced some unforeseen difficulty or expense, that does not constitute “impossibility” and will generally not be a legally valid excuse. In order to claim contract “impossibility,” the thing to be done must be objectively impossible, and not just that the promisor is simply unable to perform.
The party seeking to invoke the doctrine of impossibility or frustration of purpose should marshal evidence demonstrating the impact the pandemic has had on their business as well as the impact to the industry as a whole. By highlighting supply chain disruptions, lack of availability of personal protective equipment and vendor shut downs, the party may be able to escape the terms of the contract.
Finally, it should be noted that companies sometimes invoke force majeure not to void the agreement, but rather to encourage renegotiation of the contract or to force a compromise of a payment obligation.
Going forward, members are advised to ensure their contracts cover global pandemics and similar events, and to always have their contracts reviewed by legal counsel.