Can Coronavirus Get You Out of Your Contract?
March 13, 2020
In the face of the COVID-19 (Coronavirus Disease), you may find yourself unable to fulfill the terms of your contracts. Perhaps your supply chain is disrupted or your employees are unable to report to work. Because of these disruptions, you may be considering invoking the force majeure clause in your contract to excuse performance. A line of cases following the Avian Flu outbreak about ten years go may provide some guidance on how courts will view these apparent breaches of contract.
Keep in mind that your business decisions are going to be extremely fact specific and dependent on the language of the contract. However, the following case law provides helpful guidance and three key takeaways:
1. If you could have found some alternative way to either perform the contract or mitigate the damages your non-performance caused, the court is not going to look favorably on a force majeure defense/excuse for non-performance. Courts will not consider performance to be excused when the unforeseen circumstance (epidemic and resulting market disruption) did not make the contract completely impossible to perform.
Source: Macromex SRL v. Globex Int'l, Inc., No. 08 Civ. 114 (SAS)., 2008 BL 79637, 2008 WL 1752530 (S.D.N.Y. Apr. 16, 2008) – Globex, a seller of chicken parts, failed to supply Macromex, a Romanian company, with its contracted-for amount of chicken. Globex couldn’t deliver the chicken to Macromex because the Romanian Government declared a ban on chicken imports because of the avian flu. Macromex sued Globex for damages and the case went to arbitration. Globex’s principal defense was force majeure: “The ban came within that period of flexibility without warning, completely blocking Globex from shipping the remaining chicken to Macromex.” The arbitrator rejected the force majeure defense. Ultimately, the district court upheld an arbitrator’s decision and award of damages against Globex for breach of contract holding, in part that “Nonperformance without substitution is only justified if the impediment is totally insurmountable, not just that it affects an important element of the contract … Globex had the product, but could not deliver it. The best substitution would be delivery to another port...”
2. If your supply is disrupted, it is more likely you’re excused from performance of a contract. If your demand is disrupted you’re likely not going to be excused.
Source: Rembrandt Enters., Inc. v. Dahmes Stainless, Inc., No. C15-4248-LTS, 2017 BL 314637 (N.D. Iowa Sept. 07, 2017) – Rembrandt is a large scale producer of eggs and egg products. Rembrandt contracted with Dahmes for a large processing machine for a new facility that Rembrandt was building. In 2015 an epidemic of the avian flu hit. As a result of its lost capacity, Rembrandt declared a force majeure to its buyers and began distributing eggs and egg products on a pro rata basis. This appears to be uncontested. The issue arose because Rembrandt told Dahmes that it wouldn’t be buying the machine. They decided not to build the new facility because of the market disruption caused by the flu. Dahmes sued for breach of contract and Rembrandt sought declaratory judgment that it was entitled to terminate the agreement with Dahmes. The relevant force majeure clause between Rembrandt and Dahmes was: “Neither party shall be liable to the other for failure or delay in performance of the Work caused by war, riots, insurrections, proclamations, floods, fires, explosions, acts of any governmental body, terrorism, or other similar events beyond the reasonable control and without the fault of such party….” Rembrandt argued the provision excused its obligation to buy the machine because the outbreak of the flu made the machine useless to Rembrandt because it had no need for the new facility. The court rejected this, holding “this was not a force majeure event, as defined in the contract.” The court granted Dahmes summary judgment on its breach of contract counterclaim.
See also Rexing Quality Eggs v. Rembrandt Enters., Inc., 360 F. Supp. 3d 817 (S.D. Ind. 2018): Rexing and Rembrandt had a contract whereby Rexing would sell cage-free eggs produced by Rembrandt (this is the same Rembrandt from the other case.) Rexing breached the purchase agreement by refusing shipments of eggs from Rembrandt after demand significantly decreased. The Agreement provided that "[a]ny delay or failure of either party to perform its obligations under this Agreement shall be excused if, and to the extent that the delay or failure is caused or materially contributed to by force majeure or other acts or events beyond the reasonable control of a party hereto." Rexing sought a declaratory judgment that its refusal to accept Rembrandt’s eggs was excused by the “significant and unexpected reduced consumer demand” for those eggs. The court held Rexing’s nonperformance was not excused by the change in economic demand. The court drew this distinction: unlike the avian flu example, which may plausibly constitute an unforeseeable event precipitating a dramatic change in market conditions, a change in purchaser demand—even a substantial change—is a foreseeable part of doing business.
3. Consider the doctrine of commercial impracticability or frustration of purpose as alternative excuses for nonperformance/defenses to breach where your contract does not have an expansive force majeure clause.
Source: In Rembrandt supra, Rembrandt argued that the purpose of the contract for the machine was thwarted by the avian flu outbreak. There was no point in continuing construction because of the lack in demand. The court held this was not ripe for summary judgment. This part doesn’t get as much analysis in the case law, but I do think clients should know that, even without a force majeure clause, there’s a defense of frustration of purpose where: (1) The party’s principal purpose in making the contract is frustrated; (2) without the party’s fault; (3) by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.
The degree to which this pandemic is going to disrupt the marketplace has yet to be seen. However, businesses can control and mitigate their litigation risks by keeping the above three tips in mind as they decide whether it is feasible for them to continue to operate pursuant to current contracts.