The recent COVID-19 pandemic has given rise to widespread closures and slowdowns of businesses, government and construction. Based upon questions from clients and friends, it is clear that two words are on everybody’s mind: “force majeure.”
This article explores the concepts of force majeure and other legal issues that arise when an unusual occurrence delays or precludes performance under a contract or lease.
General Principles
There are several general principles of law that apply, or may apply, to situations in which a contract is interrupted through no fault of the contracting parties. These principles are related and overlapping but distinguishable from one another.
Force majeure refers to provisions in contracts that extend or forgive contractual obligations in the event of acts of god, war, insurrection, and potentially a whole slew of other factors that have been added over time. Force majeure clauses often include, among other things, labor disputes, acts of government and terrorism, to name just a few, and contain a “catch all” to refer to other force majeure issues not specifically listed (words like “and other occurrences beyond the control of the party asserting force majeure”).
Impracticability, or impossibility, is a relatively old common law concept that states that if a fundamental assumption underlying a contract becomes false, the contract is voidable. For example, if a contractor is hired to put a roof on a house, and a day before the contract work commences, the house burns down, it will be impossible for the contractor to install the roof.
Frustration of purpose is similar to impracticability. It is a situation in which the contract can be performed but it would be pointless to do so, and therefore the contract is voidable. For example, if a tourist agrees to rent a room with a view of a parade for the express purpose of watching the parade, and the parade is subsequently cancelled, the purpose of the rental agreement is frustrated.
Each of these issues is more specifically discussed below.
Force Majeure
In order to successfully invoke a force majeure provision contained in a contract to justify a failure to perform or a delay in performance, Pennsylvania courts generally require that the party looking to excuse the delay prove that (a) the claimed event of force majeure was truly beyond the party’s control and not the result of that party’s fault or negligence, and (b) that the party tried to perform the contract but was unable to do so. (Pennsylvania courts often cite with favor a federal decision, Gulf Oil Corp. v. Federal Energy Regulatory Commission, 706 F. 2d 444 (3d cir. 1983), cert. denied, 464 US 1038, 104 S. CT. 693, 79 L.Ed. 2d 164 (1984) for this general principle.)
Courts are often skeptical of those asserting force majeure, suspicious that such parties are just looking for excuses for their own defaults. Accordingly, courts tend to read force majeure clauses in contracts narrowly and are reluctant to give any intent to the “catch all” contained in many force majeure provisions. (See, for example, Martin v. Commonwealth of Pennsylvania Department of Environmental Resources, 120 PA Commonwealth 269, 548 A.2d 675 (1988), in which Martin attempted to justify his failure to perform on the basis of a third party’s failure to perform its obligations to Martin, and the court wasn’t buying it. In addition to the Martin case, see Senseri v. Garcia & Maggini Company, 298 PA. 249, 148 A.2d 81 (1929), Rohm & Haas Co. v. Crompton Corp., 202 WL 1023435; 488 UCC REP. SERV. 2d 172 (Court of Common Pleas 2002), and Dorn v. Stanhope Steel, Inc., 368 Pa Super 557, 524 A.2d 798 (1987).)
Impracticability of Performance
In contrast to force majeure clauses, the doctrine of impracticability relies on common law principles rather than the language of the contract itself. Even in these cases, however, courts will make sure that the parties did not address the issue more fully in any express provision of the contract, and a clear contractual allocation of risk will usually override the doctrine of impracticability.
The common law in this area dates back very far. In a case which arose in the middle of the Civil War, a coal company was unable to deliver coal because the riverworks which were the sole practical way to deliver the coal had been destroyed in a flood. The court, perhaps moved by the double catastrophe of a flood in the middle of a bloody conflict, could not hold the coal company responsible, stating “it would be a disgrace to the law if the party whose efforts are paralyzed by the act of God should be held liable for the consequences of that act, or if the act of God did not excuse a man the performance of the act which his fiat is rendered impossible.” [citations omitted] (Lovering v. Buck Mountain Coal Company, 54 PA 291 at 299 (1867).)
Modern cases refer to Section 261 of the Restatement (2nd) of Contracts (1981), which states: “[w]here, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.”
Thus, where a building burned down and the lease did not allocate the risk between the parties, a lease was deemed terminated (Greenfield v. Kolea, 475 PA 351, 380 A.2d 758 (1977)), but where the lease specified what would happen in the event of a casualty, the lease controlled and remained in effect after a flood. See Portnoy v. Omnicare Pharmaceutics, Inc., 204 WL 153780 (EDPA 2004), in which the court defers to the language in the lease that spelled out specifically what would happen in the case of a casualty.
Another important factor in cases regarding impracticability involving leases is whether the premises was entirely useless following the casualty or other event. Courts are more inclined to give relief where the property is useless. (This rationale was applied by the court in Davis v. Borough of Montrose, 194 A.3d 597 (2018), in which the existence of mold prompted a tenant to stop use of the premises. The court ruled against the tenant given that the tenant could both use the property to some degree and had in fact been using the property for a considerable period of time before it ceased operations. The Portnoy court also mentioned this fact as important in its ruling.)
Courts also seem to be reluctant to blame market conditions thus enabling parties to avail themselves of this defense. Dorn v. Stanhope Steel, Inc., 368 Pa Super 557, 524 A.2d 798 (1987) looks with favor on comment B to Section 261 of the Restatement which states:
The continuation of existing market conditions and of the financial situation of the parties are ordinarily not [assumptions on which a force an argument of impracticability can be made] so that mere market shifts or financial inability do not usually affect discharge under the rules stated in this section. In borderline cases, this criterion is sufficiently flexible to take account of factors that they are a just allocation of risk.
It is noteworthy that the first half of that comment appears to be quite strict in requiring the parties to adhere to the precise deal they struck, no matter what is happening in the world at large. The second half, however, gives equity the flexibility to go beyond the contract. Thus, the sentiment of the Lovering case continues: in unusual and widespread situations of powerlessness, the courts retain flexibility to relieve contracting parties of their obligations.
Frustration of Purpose
As noted in the introduction, frustration of purpose is theoretically a different construct from impracticability. In impracticability, the substance of the contract is impossible, or virtually impossible, to complete due to forces beyond the control of the parties. In frustration of purpose, on the other hand, the parties could actually carry out the contract, but the reason for doing so has been destroyed.
In practice, at least in Pennsylvania, the two doctrines converge. Many cases refer to the doctrines interchangeably and often as if they were the same thing. (For some examples, see Ellwood City Forge Corporation v. Fort Worth Heat Treating Company, Inc., 431 Pa Super 240, 636 A. 2d 219 (Pa Super 1994); Step Plan Services, Inc. v. Koresko, 12 A. 3rd 401 (Pa. Super 2010).)
Thus, you should assume that courts will generally apply the same qualifications and analysis to Frustration of Purpose that the courts apply to Impracticability.
Conclusion
As we are faced with the unprecedented challenges presented by COVID-19, nothing is certain, but based on precedent, the following principles are sensible:
1. Read the contract thoroughly. If it addresses a specific provision, chances are the contract will govern. Review should not be limited to reading the specific force majeure clause but should encompass any clause that might impact the parties’ allocations of risk and responsibility in unusual situations.
2. Consider your actions and how they will be perceived later. Many, if not most, cases revolve around the court’s skepticism as to whether a party is using force majeure, impracticability, or frustration of purpose as a convenient excuse for non-performance.
3. If you have a legitimate reason to be delayed or are prevented from performing contractual obligations (e.g., the government isn’t issuing permits or is not allowing your employees to come to work), you should notify the other party promptly, and do what you can to find alternative solutions and keep things moving. If your contract requires you to take steps to assert force majeure, make sure you take those steps in a timely way. Demonstrate that you are really trying to fix things, but if you are going to assert that you cannot perform at all, be sure that is true and also that your actions reflect that truth.
4. On the receiving end, if someone is asserting force majeure, promptly respond to requests, and grant requests that sound reasonable if at all possible. If you are going to deny force majeure as a basis for delay of performance by the other party, promptly state clearly the basis for denial, and take aggressive steps to figure out how you will obtain performance from a third party. If the other party to a contract cannot actually perform, you may need to mitigate damages by getting substitute performance by another provider.
Ultimately, because of the ubiquity of COVID-19, we expect that courts will come down reasonably hard on a party who wrongfully denies a force majeure claim for a reasonable extension of time. Rightly or wrongly, the equities in this environment are likely to favor those asking for more time.
5. A few issues to ponder:
a) Will tenants be able to assert force majeure to avoid payment of rent? There is no case in Pennsylvania that directly addresses that, though many leases that have force majeure clauses expressly prohibit a tenant from using that clause to claim it does not have to pay rent. Some factors courts will likely consider if the lease is silent: (a) can the tenant operate at all, or has it been forced to shut down by governmental act? (b) is the tenant in fact operating? (c) has the lease commenced? (d) if the lease has not yet commenced (or can’t commence) because tenant fit-up work has not been completed, does the lease provide what happens? Again, many leases directly address these issues in the tenant work-letter, so the parties may have already allocated this risk. Courts will not lightly disregard that allocation.
b) Will any statutes retroactively solve these issues? After the 2008 financial meltdown, many states, of which Pennsylvania is one, extended grandfathering of permits so that projects that were delayed could obtain and maintain permits beyond otherwise legally mandated deadlines for applying or using those permits. It is easy to envision similar relief being adopted in short order, especially with government closing. Should that happen, it will aid parties in being able to work with the government; it may not aid two private parties in determining how to move forward between themselves.
This article provides a framework to help you understand the questions to ask as we grapple with the rapidly evolving spread of COVID-19; it should not be construed as legal advice and it is by no means a “one size fits all analysis.” Always consult legal counsel before making decisions.
