The year 2020 has brought with it extreme and extraordinary circumstances nationally and across the world. The COVID-19 pandemic resulted in vast swaths of business and industry shutting down or pivoting practically overnight to different modes of operation. It will continue to have unforeseen ramifications for the rest of the year and beyond as all aspects of the economy and society, including institutions of higher education in particular, deal with the challenges of trying to resume operations during the ongoing pandemic. Almost midway through 2020, nationwide mass protests and riots resulted in curfew orders, closures, and significant property damage. These incidents were something that no one could have foreseen and resulted in additional and continuing disruptions to institutional operations. About the only certain thing is that the remainder of the year and in coming years, there will be events or incidents that significantly and perhaps even fundamentally, disrupt regular, expected operations and functions, and that will impact contractual arrangements and expectations.
One of the major reasons to have legally enforceable contracts is to provide certainty to the parties—certainty regarding dates, times, amounts, venues, payments, etc. With this certainty, the parties can plan and set expectations. Typically, contract terms are, as a result, strictly enforced. However, dating back to some of the earliest days of the common law of contracts, there is a recognition in our legal system that sometimes uncontrollable, unforeseen, or unpredictable circumstances or conditions arise, due to no fault of the contracting parties, that make performing a contract essentially impossible. As a result, courts have used this basis to excuse non-performance of the contract. Generally, the legal doctrines describing this are somewhat not creatively called impracticability or impossibility of performance and frustration of purpose. The term “hardship” is also sometimes used. A common term describing this doctrine is “force majeure,” literally meaning “superior force” in French. With the pandemic and other recent events, the concept of force majeure has taken on renewed interest among attorneys and institutions.
This article will just touch on some of the very basics of the concept of force majeure in contractual obligations, providing some brief history, an overview of some different considerations around the types of contracts and invoking force majeure, and concluding with some thoughts on what to change for future contracts.
Background of Force Majeure
As early as the 16th century, English common law recognized concepts of impossibility of performance as excusing non-performance under a contract. The seminal case establishing the concept, however, was Taylor v. Caldwell, in 1863. In that case, Taylor had a contract to use a music hall owned by Caldwell, for which Taylor would pay £100 at the end of each day. Before the first performance, the music hall burned down. Taylor sued Caldwell for the expenses in preparing for the concerts. The court excused Caldwell’s performance, saying that “In the present case, looking at the whole contract, we find that the parties contracted on the basis of the continued existence of the Music Hall at the time when the concerts were to be given; that being essential to their performance. We think, therefore, that the Music Hall having ceased to exist, without fault of either party, both parties are excused….”
In 1883, in a case called The Tornado, the U.S. Supreme Court accepted the principle set out in Taylor v. Caldwell. In The Tornado, the owner of a ship named The Tornado had contracted to deliver freight from New Orleans to Liverpool, England. The ship accidentally caught fire and was no longer seaworthy. Because The Tornado was no longer able to deliver the goods due to no fault of either party, the court excused performance.
Since then, state and federal courts as well as legislatures have refined and developed the principle. Oftentimes, there has been fairly typical force majeure or “act of God” provisions in all sorts of contracts. Until now, they were often treated as boilerplate language, rarely invoked. They included acts or occurrences like “acts of God, earthquakes, fires, floods, wars, civil or military disturbances, acts of terrorism, strikes, riots, labor disputes, and acts of governmental authorities.” Sometimes, there would be just a generic reference to “acts of force majeure” in agreements. Each state has different standards on how to interpret and enforce force majeure provisions. Though the language may look similar, it is likely that courts will undertake a case-by-case interpretation.
Practical Considerations Around Force Majeure
Initially, it is important to remember that triggering contractual remedies like force majeure is pretty extreme. Invoking force majeure (and similar concepts) is an affirmative defense in contract claims. That means force majeure is raised and fleshed out when the parties are already in litigation or formal dispute resolution. These provisions do, however, give a basis for the contract parties to try to resolve their issues early on without costly and uncertain litigation or formal dispute resolution. The parties would be well served by exploring different options such as modifying and altering, even for a temporary period of time, the contract performance expectations. Typically, when performance has been impacted by unforeseen events or circumstances that are not the fault of either party, they are interested in preserving the relationship so that once the crisis is past, future transactions can be undertaken between them. Most vendors and contractors and institutions of higher education want to find some reasonable solution such as discounts or credits for future services or programs or agreeing to some reasonable compromise on termination of the agreement rather than going right to litigation and invoking force majeure and other similar remedies. In most cases, the practical reality is that going down the road of formal dispute resolution and judicial proceedings, invoking force majeure and similar remedies, will probably be too resource intensive to pursue and will create unintended reputational concerns. Considerations of preserving relationships with other contractual parties as well as with the larger community of governments and employees likely mitigate against immediate escalation to invoking these types of provisions.
That being said, when considering force majeure (and this may seem obvious), institutions need to determine what kind of contract is at issue. The type of contract will impact other issues of remedies, damages, choice of law, venue, and other elements. For example, purchase, sale, or lease of goods contracts are typically governed by the Uniform Commercial Code and may provide remedies that can be invoked in addition to or in lieu of force majeure. There may also be institutional or governmental procurement codes, regulations, or policies that the parties agree to be bound by that contain provisions around performance, dispute resolution, and available remedies that set out a particular pre-determined course of action. This can, of course, limit the available scope of actions and remedies that can be considered by the parties, which may or may not be desirable.
Real estate-related agreements typically call for strict performance. Force majeure or hardship provisions will probably not excuse strict performance or payment of rents under the agreement. There may be other issues in real estate-related agreements that are implicated such as use restrictions related to agreements with health care entities or providers and the covenant of quiet enjoyment as well. In these instances, the parties will need to consider other possible remedies and mitigation efforts.
Sponsored research and clinical trial agreements will have patient and human subject safety requirements that are likely the overriding consideration if performance under the contract becomes an issue. Trying to invoke force majeure (or other defenses) in such instances will not be practicable. Additionally, federal government requirements around performance and dispute resolution in federal grant-funded research contracts will need to be taken into account for those types of agreements. They typically are more restrictive around the types of available remedies.
Event agreements, such as for performances, speakers, or concerts, will often have force majeure provisions but whether pandemic, epidemic, disease outbreak or governmental restrictions are specifically spelled out as force majeure events to be invoked or if it’s just a catchall term will need to be taken into account. Courts will likely interpret force majeure provisions strictly so if the language in the contract doesn’t specify a pandemic outbreak, the court will likely not permit it to apply. Additionally, remedies may be different, depending on whether a cancellation versus a rescheduling of the event takes place. Cancellations likely invoke liquidated damages (meaning a defined amount of money) versus a rescheduling that can mitigate that. Athletic event contracts will require special consideration around conference requirements and may have NCAA implications as well.
Employment-related and collective bargaining agreements have a different set of considerations. Individual employment contracts probably will not have force majeure provisions and you will need to consider other remedies like impossibility, impracticability, and frustration of purpose if considering termination. Such remedies may not be necessarily available or are extremely limited, especially for employment contracts. Collective bargaining agreements may contain force majeure provisions but also probably have notice requirements before they can be invoked. Also, there are other statutory obligations, such as the WARN Act, that are implicated if you try to terminate employment-related contracts. A relatively recent example of force majeure implications for employment contracts is set out in Kaltenbaugh v. Board of Supervisors, where the Board of Supervisors of Southern University and Agricultural and Mechanical College at Baton Rouge invoked a force majeure plan for tenured professors at Southern University at New Orleans. The plan was invoked because of the damage from Hurricane Katrina in 2005. In that case, the court ultimately determined that due process still had to be followed, even in circumstances of force majeure, and that the university did not sufficiently do so in that case. It is a reminder that employment-related contracts likely have special considerations that need to be taken into account when invoking force majeure.
Considering force majeure for contracts that have international implications, including study abroad and international study or research program agreements, will also require individualized analysis. There may be arbitration requirements or other dispute resolution measures in international contracts that trigger or are triggered by international standards for force majeure and similar remedies. The parties may invoke or look to various international conventions and associations that have language and terms regarding force majeure and hardship in addition to any applicable law or regulations of the jurisdiction of the applicable country. For example, the United Nations Convention on Contracts for the International Sale of Goods, the International Institute for the Unification of Private Law, and the International Chamber of Commerce could be resources that are looked to if it is an international contract that is at issue if the specific location/jurisdiction may be lacking law relating to force majeure events and other remedies.
The Future Outlook
In the future, there will no doubt be close examination of and changes to force majeure provisions, indemnification, and insurance coverage language in contracts. Parties will want to make changes to adjust and possibly clarify risk allocations in contracts. In all likelihood, force majeure clauses will no longer just be boilerplate and will be more bespoke and tailored to the circumstances. Vague or ambiguous elements will need to be clarified to either include or exclude pandemics, epidemics, and other disease outbreaks as force majeure events as well as other governmental declarations that may affect performance. Damages provisions will likely need to be reviewed to consider incidental and consequential damages inclusion or exclusion as well as liquidated damages provisions and when these may or may not be desirable. Requirements around mitigation efforts not only for the contract but also for mitigating disease spread and clarifying what may be reasonably expected will probably be required. Looking to and considering language around applicable standards, such as the World Health Organization, the U.S. Center for Disease Control, and other authorities will likely be more commonplace.
But remember, trying to work through the situation with the other contracting parties will be the best option in terms of expense, reputation, and future relationships. Force majeure likely should be the last resort.
Art Lee, JD, is the deputy general counsel at the University of Arizona.
Takeaways
- Force majeure provisions in contracts before March 2020 were largely considered boilerplate; in other words, contract terms that were fairly standardized with not much thought given to them. Now, and going forward for the immediate foreseeable future, force majeure provisions will and should receive closer scrutiny and attention given the large-scale disruptions (or not insignificant potential for disruptions) to regular, expected activities.
- Carefully consider whether to invoke force majeure provisions in agreements. Mutually agreed upon alternatives to invoking them can help preserve the relationship between the parties for the future and minimize reputational impact. Also, because courts typically very strictly interpret force majeure provisions, there is risk that the outcome from invoking them may not be desirable.
- Different types of contracts will have different considerations around force majeure, including how they are worded, interpreted, and enforced. When either drafting a provision to be included in an agreement or evaluating the scope of what is already there, the type of agreement and what it’s for will significantly impact the analysis.
- In the future, force majeure terms will likely already take into account things like pandemic outbreaks and governmental declarations. There will probably be closer scrutiny over force majeure provisions in contracts and possible ancillary concerns over their impact on other areas like insurance coverage, risk-shifting (e.g., indemnification and hold harmless provisions), and damages clauses.
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