ILMA Compoundings - May 2020 - 36

COUNSEL COMPOUND

COVID-19 and Your
Contracts
By Jeff Leiter

I

was talking in early March with
Petroleum Quality Institute of
America President Tom Glenn, and
he gave me the idea for this month's
column. It is an understatement that
the novel coronavirus (COVID-19)
pandemic, and the strong mitigation
and containment measures implemented to fight it, have substantially
disrupted and decreased economic
activities that rely on ILMA members'
products. Because these negative
effects have made it difficult, if not
impossible, for many parties to contract to perform their obligations as
originally intended, many businesses
are asking whether they are obligated
to perform under their contracts, or
whether they can invoke the contract's
force majeure or impossibility clause to
excuse performance (either temporarily or permanently). Let's take a
look at force majeure or impossibility
clauses in contracts, recognizing that
the nature of the event and its impact
on specific contracts and their performance by the parties will vary.
Unless expressly provided in the
contract, force majeure is not a standalone defense to a breach-of-contract
claim in common law jurisdictions,
such as the U.S. and U.K. However,
force majeure is implied into every
contract, unless the parties agree
otherwise, in civil law jurisdictions,
such as Germany and France. Thus,
contracting parties in both types of
jurisdictions, as a matter of practice,
include force majeure provisions in

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MAY 2020

| COMPOUNDINGS | ILMA.ORG

their agreements. By negotiating force
majeure provisions, the parties are in
the best position to allocate the consequences of nonperformance between
themselves.
A contract's force majeure clause
is intended to excuse one or both
parties' performance obligations when
circumstances arise that are beyond
the parties' control and that make performance of the contract impractical
or impossible. Force majeure circumstances typically include: (a) acts of
God (e.g., floods, fires, earthquakes
and hurricanes); (b) war, acts of
terrorism and epidemics; (c) government regulations; (d) strikes and labor
disputes; and (e) certain accidents.
Economic hardship, by itself, typically
is not enough to qualify as a force
majeure event, unless specifically negotiated and written into the agreement.
Most courts narrowly interpret
force majeure clauses, meaning that
a fact-intensive inquiry is normally
made of the specific language in the
contract. Courts try to limit damages
to where the reasonable expectation
of the parties and the performance
of the contract have been frustrated
by circumstances beyond the control
of the parties. The parties' reasonable
expectation is determined by whether
the specific event claimed to be preventing performance was foreseeable
or unforeseeable.
While more properly suited for
a lengthy law review article, if a
pandemic is now a foreseeable event

because of the worldwide COVID19 outbreak and it is not specifically
listed as a foreseeable event in the force
majeure clause, a court likely will find
that the party claiming its nonperformance assumed the risk and is liable
for damages from its nonperformance.
While it may still be possible that a
pandemic like COVID-19 could be
covered as an act of governmental
regulation, such as where states have
instituted lockdowns to prevent the
spread of the novel coronavirus, more
attention definitely needs to be paid to
force majeure clauses in your contracts
going forward.
Let me give you an example.
Assume that a contract's force majeure
clause states, in part, " ... including
an epidemic, pandemic, quarantine
restriction or other public health
restriction or advisory, the time for
the performance shall be extended
or excused ... ." Is the COVID-19
disease outbreak an "epidemic" or is it
a "pandemic"? Is a company's self-quarantine a "quarantine restriction"?
What constitutes an "advisory"? Does
a U.S. State Department cautionary
travel advisory or guidance from
the Occupational Safety and Health
Administration satisfy this term? Unless
the event is specific or the words are
clear, then a court or an arbitrator
likely will have to determine whether
the nonperformance falls within the
force majeure clause and whether such
nonperformance is excused based on
Continued on page 39
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