445 S. Figueroa Street, Suite 2350, Los Angeles, California 90071

“Irresistible Superhuman Cause”

Contractual Rights and Obligations in the Time of the Coronavirus Pandemic

(For the full blog with citations please click here)

As of this writing in early April 2020, we are witnessing a deepening global health and economic crisis.  We are all focused on our loved ones and groceries and the latest news.  But this too shall pass, and when it does, we will need to reckon with the legal and economic consequences of cancelled events, missed shipments, delayed construction projects and the like.

The coronavirus pandemic has disrupted, and will continue to disrupt, all aspects of commerce.  Contract disputes will surely arise.  But where a failure to fulfill contractual obligations is nobody’s fault, how will the law allocate loss?  The doctrines of force majeure and impracticability will play a major role in the outcomes of post-coronavirus contract disputes.

This article surveys California law governing the twin defenses of force majeure and commercial impracticability (traditionally referred to as “impossibility”).  The article then evaluates how courts might apply these doctrines to contract disputes where performance was frustrated by the coronavirus pandemic.

The California Civil Code

Generally speaking, the law holds parties to their contractual promises, even when an obligor’s personal circumstances prevent it from fulfilling its obligations.  But the law is not totally inflexible; it will bend to excuse non-performance when performance is objectively impossible.  The California Civil Code defines objective impossibility with the maxim that “[e]verything is deemed possible except that which is impossible in the nature of things.”

Section 1511, in turn, provides that non-performance is excused “[w]hen it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of his state or of the United States, unless the parties have expressly agreed to the contrary.”

These broad statutory pronouncements leave it to the courts to decide which events constitute “irresistible, superhuman causes.”  Importantly, however, Section 1511 explicitly provides that parties agree that one party will bear the risk of an act of God or other irresistible force.  Indeed, as discussed below, the precise language used in a commercial contract’s force majeure clause will often dictate the outcome of a contract dispute.

The Case Law

In Pacific Vegetable Oil Corp. v. C.S.T., Ltd, the California Supreme Court considered whether “force majeure” included events beyond natural disasters.  In that case, the defendant agreed to ship a large quantity of copra (dried coconut kernels) from the Fiji Islands to San Diego.  The contract, executed in November 1941, required the seller to deliver the copra by February 1942.  On December 7, 1941, however, the Imperial Japanese naval forces attacked Pearl Harbor, and the United States entered World War II.  Under the newly enacted wartime laws, the United States imposed restrictions on exports that prohibited the seller from delivering the copra in accordance with the terms of the supply agreement.  The buyer initiated an arbitration action against the seller for breach of contract.  When the arbitrators entered an award in favor of the seller, the buyer sued to vacate the award on the ground that World War II was not an act of God.

The California Supreme Court upheld the arbitration award, finding that the buyer’s interpretation of a force majeure was too narrow.  The Court held that:

The test is whether under the particular circumstances there was an insuperable interference occurring without the party’s intervention as could not have been prevented by the exercise of prudence, diligence and care.

But while Pacific Vegetable Oil settled the question that a “force majeure” event includes circumstances beyond natural calamities, the impracticability/force majeure defense has important limits:

  • Subjective impracticability is not a defense.

A defendant asserting an impracticability defense, or invoking a force majeure clause, must establish that performance was prevented by an “irresistible, superhuman force” that made it objectively impracticable to perform.  As noted, the California Supreme Court upheld the defense award in Pacific Vegetable Oil because circumstances beyond the supplier’s control prevented performance.

By contrast, the law will reject a force majeure defense based on the inability of the promisor to perform because of its own individual circumstances, especially if the problem is of its own making.  For example, the Court of Appeal rejected the City of Los Angeles’ defense when it cancelled a construction contract because the project was “impossible” after the City failed to secure the necessary entitlements from the State of California before committing to the project. Applying the same principle, a federal district court held that a performer’s unanticipated incarceration did not excuse his failure to appear at a concert.

  • Force majeure will not save a party from bad business outcomes.

Unforeseen difficulty or expense in fulfilling contractual promises also will not, without more, excuse performance.  As the Court of Appeal has explained, a “force majeure clause is not intended to buffer a party against the normal risks of a contract.”There was therefore no force majeure defense available for a racetrack that promised a pay-out that exceeded the amount collected in race day bets, even when the low betting revenue was an anomaly. Nor did the California Supreme Court allow a defendant to invoke a clause excusing performance in the event of a “strike, lockout, or other labor trouble” when performance of the contract merely posed a threat of future labor troubles.  The lesson from this line of cases is that when the commercial bargain turns out worse than anticipated for one of the contracting parties, the party must take its lumps and still do what it promised.

  • The party invoking force majeure must have exercised diligence.

The Pacific Vegetable Oil decision contains an important caveat: the party relying on a force majeure defense must establish that it exercised “prudence, diligence and care.”  This issue arose in Holt Manufacturing Co. v. Thorton, where the contractor argued that a hurricane prevented it from harvesting the farm owner’s grain.  The California Supreme Court rejected the force majeure defense because the evidence showed that the contractor had started its work late. If the contractor had started on the day appointed in the contract, it could have completed its work before the hurricane struck. Diligence also requires that a party undertake all reasonable measures to meet its contractual obligations.  For example, where the evidence established that a paper supplier did not attempt to obtain the necessary materials from a third party, it was precluded from invoking the force majeure clause.

  • The duty resumes when the crisis ends.

The occurrence of a superhuman event does not necessarily excuse performance completely.  The general rule is that “partial impossibility ordinarily discharges the duty only to the extent thereof.”  So if the contract can still be partially performed, the law expects that the party will do so.  In a similar vein, if the situation giving rise to impossibility is temporary, the parties may be expected to perform once the crisis abates.  Finally, if a party has partially performed when conditions have rendered completion of its duties impracticable, the party may generally recover the value of its partial performance.

  • The force majeure defense is often a question of fact.

The interpretation of a force majeure clause requires a review of the facts of the particular dispute.  The closely related impracticability common-law defense likewise involves an analysis of the specific facts of the case. For this reason, these defenses may not usually be resolved by dispositive motion.

Will the Coronavirus Pandemic Excuse Contractual Performance?

The specific language of a force majeure clause will frame any dispute about whether performance of a contract is excused.  But in the absence of a force majeure provision, or when the provision is subject to more than one interpretation (which is often the case), courts will draw upon the authorities discussed above to make its judgment, or to instruct the jury on the law.  While the outcome of every case will depend on its own facts, many of these force majeure cases will confront these common questions:

  • Is the pandemic a force majeure rendering performance impossible?

A plaintiff opposing a coronavirus defense could argue that performance was still possible.  The defendant, the argument would go, could have implemented appropriate precautions and still honored the contact.  These measures may make performance of the contract more expensive or inconvenient, but additional expense and inconvenience do not excuse performance.  Why should the aggrieved contractual party bear the loss of the bargain?

In most situations, this argument probably will not fly.  First, federal, state and local governments have imposed restrictions on commercial activities, including orders requiring “non-essential” businesses from ceasing all activities in public spaces. These emergency orders, like the wartime laws at issue in Pacific Vegetable Oil, render performance of contracts objectively “impossible.”  Second, for all of its faults, the law is not “an ass,” as the saying goes.  Generally speaking, judges are reasonable people who seek to achieve just and commonsense outcomes.  And any reasonable person would conclude that the coronavirus pandemic constitutes a force majeure as terrible and disruptive as any hurricane, earthquake or war in recent history.

  • Does the contract allocate risk?

It does not necessarily follow, however, that the non-performing party is off the hook.  The success of the defense may depend on the specific force majeure language.

Some force majeure provisions explicitly include “diseases,” “epidemics” and “quarantines” as a force majeure events that excuse performance.  Other contracts, however, shift the risk to one of the parties in all circumstances, including worldwide pandemics.  In such cases, courts may consider the bargaining powers of the parties and whether such provisions are procedurally and substantively unconscionable.  Although the standard for establishing unconscionability in commercial contracts is theoretically the same as the showing for consumer contracts, a defendant must still show “a substantial degree of unfairness beyond ‘a simple old-fashioned bad bargain.’” While the outcome will depend on the particular facts of the case, the unconscionability hurdle will be too high for most defendants to clear.

  • Has the party asserting the defense exercised diligence?

The party seeking to be excused from performance by reason of force majeure or impracticability must establish that it exercised prudence, diligence and care.  In deciding a force majeure/impracticability defense, the trier of fact may consider whether the defendant could have or should have fulfilled its obligations before governmental authorities issued stay-at-home orders.  Given the nature of the coronavirus pandemic, it is difficult to conceive of many scenarios where a party’s lack of diligence precludes a force majeure defense.

  • Is partial performance required?

For some contracts, like agreements related to special events scheduled for a specific date (a St. Patrick’s Day concert, for example), the coronavirus epidemic likely will be a complete defense to a breach of contract action.  But for other contracts, partial or delayed performance may be required.  Could some of the work be done safely at home?  Could performance be delayed until after the epidemic is resolved and the stay-at-home orders lifted?  If the answer to either question is yes, partial or delayed performance may be required, even if such performance engenders greater cost or inconvenience to the party required to perform.

  • Rescission and restitution

If the court accepts the defendant’s impracticability or force majeure defense, the plaintiff will usually be entitled to rescission and restitution.  In other words, the plaintiff should likewise be relieved of any obligations under the contract and be compensated for any payments made or costs expended so that both parties are restored to their pre-agreement positions.  A court sometimes may order partial rescission, but only if the contract lends itself to being separated into divisible agreements.

The coronavirus pandemic has upended all facets of life.  Someday soon (hopefully), we will return to our daily routines and begin picking up the pieces.  For many businesses, the starting point will be to evaluate whether and to what extent they have recourse for the economic disruptions caused by the pandemic.  A key component of this commercial triage is to analyze all current contracts — including leases, personal service agreements, event contracts — and to determine if a force majeure provision or common law impracticability defense excuses performance.

Contact our Los Angeles business litigation team now

If you need dedicated legal guidance related to business contract disputes or contractual obligations related to the coronavirus pandemic, do not hesitate to contact Steinbrecher & Span. In order to adhere to state, county and city orders and regulations, our attorneys are working from home for the time being, but our firm remains fully open and operational. Call us today.

(For the full blog with citations please click here)