By Kathleen J. Smith, Civil Litigation Attorney
Let’s be clear—Covid 19’s pandemic shutdown may affect your company’s ability to perform its contracts, but it’s no panacea for avoiding all your business obligations. Your contracts may contain variously worded “force majeure” clauses. That doesn’t mean you can ignore paying for services already received.
Here is a typical force majeure clause:
Force Majeure. Any delay or failure by either party hereto in performance hereby shall be excused if, and only to the extent that, such delays or failures are caused by occurrences beyond such party’s control, including Acts of God, decrees or restraints of governments, strikes or other labor disturbances, war, sabotage, and any other cause or causes which cannot be controlled by such party. Notification of such delay or failure in performance shall be promptly provided to the other party, including the cause thereof, and the extent of the performance which will be delayed or not performed.
See that? If the pandemic shutdown qualifies as a “decree or restraint of government” causing delay or failure in your performance, you have to promptly notify the other party about the effect on performance. Many commercial landlords have tenants who failed or delayed paying rent without ever telling the landlord that the shutdown caused the failure or delay.
On the other hand, if normal business vagaries and risk exposure caused the failure or delay in performance, force majeure is not a trump card. “A force majeure clause is not intended to buffer a party against the normal risks of a contract. The normal risk of a fixed-price contract is that the market price will change. If it rises, the buyer gains at the expense of the seller ...; if it falls, as here, the seller gains at the expense of the buyer.... A force majeure clause interpreted to excuse the buyer from the consequences of the risk he expressly assumed would nullify a central term of the contract.” Horsemen's Benevolent & Protective Assn. v. Valley Racing Assn., 4 Cal. App. 4th 1538, 1565 (1992), modified (Apr. 6, 1992) citing Northern Indiana Pub. Serv. v. Carbon County Coal (7th Cir.1986) 799 F.2d 265 at 275.
If the pandemic shutdown makes it illegal for you to perform—think live stage performances—then you have a defense to a breach of contract claim.
Witkin says: The excuse of impossibility is covered in several Code sections:
“A condition in a contract, the fulfillment of which is impossible or unlawful … , or which is repugnant to the nature of the interest created by the contract, is void.” (C.C. 1441.)
“The object of a contract must be lawful when the contract is made, and possible and ascertainable by the time the contract is to be performed.” (C.C. 1596.)
Performance is excused “[w]hen it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States.” (C.C. 1511(2); see Pub.Contr.C. 7105(a), (b), infra, § 1027.)
In sales, California Commercial Code 2615 provides excuse by failure of a presupposed condition that there would be no pandemic. But the seller may be required to make/produce whatever product they are able and allocate among buyers. Section 2615 provides:
Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:
(a) Delay in delivery or nondelivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.
(b) Where the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.
(c) The seller must notify the buyer seasonably that there will be delay or nondelivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.
Lawsuits are still happening, even with the shutdown of many law offices and courthouses. Contact our litigation experts today! We can remotely intake any new case and enforce contract rights in court with complete efficiency. Pleadings are filed electronically. Court hearings are telephonic. Even mediations and arbitrations are done on videoconferencing platforms. Lawsuits happen—completely untouched by human hands, with personal attention remotely applied.