The unprecedented response to the widespread threat to public health posed by the COVID-19 virus is now severely limiting commercial activity. In some industries including restaurants, retail, hospitality and entertainment, emergency declarations from the president, the governor, county executives and mayors have forced closures or limitations in operations.
Efforts to impose social distancing and to limit work at offices and job sites has focused attention on whether contractual obligations can be enforced under these circumstances. Agreements governing delivery of supplies, service and construction contracts have been impacted.
Delayed Performance and Force Majeure Clauses
Many contracts contain provisions that address allocating risks associated with delayed performance. The purpose of force majeure provisions is to identify circumstances when performance might be delayed or excused entirely due to circumstances that result in conditions that were unforeseeable to the parties at the time of contract formation. Events that often are identified as triggering force majeure provisions include acts of God— severe weather events such as hurricanes, floods and wildfires—which often are categorized as “unusually severe weather conditions which could not have been reasonably anticipated.” Other triggering events identified in force majeure clauses include labor strikes or lockouts, war and civil disturbances.
In the construction context, the AIA A-201 (2007 and 2017) standard contract list many of these events as well as “unavoidable casualties or other causes beyond the contractor’s control.” Consensus Docs also specifically identifies events and includes “epidemics” in its list. Both contract forms state that the owner may allow additional time while the subject of additional compensation is unresolved.
The circumstances required for triggering a force majeure clause involve an event that is:
- Beyond the control of the contracting parties;
- Unexpected; and/or
Many contracts contain procedures governing when and how a force majeure provision is to be asserted. Adhering to the procedural requirements is essential to successfully obtaining relief. Also, the choice of law provisions can affect the outcome. New York law, which governs many commercial contracts, views force majeure provisions as disfavored and they are narrowly construed. For example, in the case of the coronavirus, if the list of circumstances triggering the force majeure provision does not include a broad category such as a “public health emergency” or “epidemic”, then relief may be problematic.
Alternatively, if the force majeure clause contains broader categories of events such as “civil unrest” or “public emergency,” reference to the currently issued public emergency declarations, their restrictions on operations and the need to protect employees and the general public are facts that support the circumstances justifying the delayed or possibly excused performance contemplated by a force majeure clause.
Washington has little case law specifically addressing application of force majeure provisions. Courts will apply rules of contract interpretation to determine the intent of the parties. Hearst Co. v. Seattle Times, 154 Wn.2d 493 (2005). An early case ruled that an Act of God alone rendered performance of a marriage contract impossible when the bride’s tuberculosis condition worsened. Grover v. Zook, 49 Wash. 489 (1906). It is unclear whether courts today also will view the coronavirus or other diseases as an Act of God unless performance is impossible. The analysis likely will be fact dependent. One case involving claimed business loss when the WTO riots forced the cessation of electric service has been viewed as standing for the proposition that performance may be excused when the required performance would violate a statute. Citoli v. Seattle, 115 Wn.App 459, 61 P.3d 1165 (2002). In that case, the statute was a tariff allowing service to be ceased in the event of a civil emergency. Here, the COVID-19 emergency declarations issued by the president, the governor, county executives and mayor are based upon similar statutory delegations of power.
Washington courts have recognized that contractual obligations may be avoided when performance is impossible or impractical—meaning when performance becomes unreasonably difficult, prohibitively expensive or dangerous. In such cases, the reason for non-performance must be fortuitous and unavoidable on the part of the promisor. Oneal v. Colton Consol. School Dist., 16 Wn. App 488, 491, 557 P.2d 11 (1976) (blindness rendered performance of teaching duties impossible); 10 Washington Practice, § 10:15. An objective standard is applied. Courts have rejected the impossibility or impracticability defenses when the intent is to advance a claim that performance simply has become more expensive—a condition that the courts often consider to be foreseeable.
Assuming that the grounds for invoking the force majeure provision exists, determining the appropriate remedy may be complex. If the remedy specified in the provision is delayed performance, the question will be who determines the duration of delay, whether additional compensation will be paid for de-mobilizing, re-mobilizing and completing the work. Some force majeure provisions require the party whose performance is the subject of the contract to mitigate the impact of the event to the greatest extend possible. An equitable adjustment in the contract sum and/or an extension of time for performance sometimes are identified as available remedies.
An alternative remedy if performance cannot be rescheduled, might be termination, in which case the contractor could be entitled to a quantum meruit remedy of payment. Quantum meruit is used to recover the reasonable value of services provided when there is evidence of a contract in fact to recover the reasonable value of services provided or when a change occurs that was not in the contemplation of the contracting parties. Another alternative in the absence of a specified remedy is the parties implied duty to exercise good faith and fair dealing. This duty implied in every contract creates an obligation to consider alternative ways for each to obtain the “full benefit of performance.” Metropolitan Park District of Tacoma v. Griffith, 106 Wash.2d 425, 723 P.2d 1093 (1986). Efforts to renegotiate the time for and cost of completing performance are a logical starting point.
As we go through an unprecedented economic event—the times call for a pragmatic approach to evaluating risk, forging solutions to meet contractual expectations and delivering necessary goods and services.