Are the Bills Still Due?
With the global COVID-19 pandemic well under way the above question is likely burning in most of American’s and fellow Washingtonians minds. Below are some helpful bullet points of pressing legal issues proceeded by an in depth look at those points.
• The state of Washington has paused the legal process for evictions, but your payment is still due. Failure to pay could lead to future evictions as well as penalties and fees. Pay your rent now, if at all possible, or talk with your landlord directly.
• Similarly, your mortgage is likewise due. Speak to your bank if you cannot make your payment.
• Many utilities are extending emergency credits and services, but these bills are also due.
• If you occupy commercial property, you need to check for what is known as a “Force Majeure Clause”. In short, look to your contract first! Read the in depth description of “Force Majeure” below.
• If you are worried about any contract obligations you cannot complete, look to the specific terms of all of your other contracts.
• If you intend to invoke a Force Majeure clause, you will likely need to provide sufficient notice.
In Depth Look at Force Majeure:
Force majeure clauses are contract provisions that excuse a party’s nonperformance when “acts of God” or other extraordinary events prevent a party from fulfilling its contractual obligations.[1] These clauses are currently garnering attention due to the coronavirus outbreak (COVID-19), which has significantly impacted the global economy and businesses’ ability to manufacture, distribute, and sell their products.[2] Due to the risks that COVID-19 poses to ongoing business operations, companies should proactively consider the potential impacts a global pandemic could have on their operations, take steps to mitigate their operational risk, and assess the availability of insurance coverage in the event that risk materializes. Taking these proactive measures will decrease the likelihood of force majeure disputes in the future; it will also help any party asserting a claim of force majeure to establish that it took reasonable steps to avoid contractual interruption.
Basic Principles of “Force Majeure” Clauses
Courts look to several elements when considering the applicability of a force majeure clause: (1) whether the event qualifies as “force majeure” under the contract, (2) whether the risk of nonperformance was foreseeable and able to be mitigated and (3) whether performance is truly impossible.
The primary focus is on whether the clause encompasses the type of event a contractual party claims is causing its nonperformance.[3] Force majeure clauses are generally interpreted narrowly; therefore, for an event to qualify as force majeure it must be outlined in the clause at issue.[4] Even when a potential force majeure event is encompassed by the relevant clause, however, a party is under an obligation to mitigate any foreseeable risk of nonperformance, and cannot invoke force majeure where the potential nonperformance was foreseeable and could have been prevented or otherwise mitigated.[5] Furthermore, depending on the relevant contractual language and governing law, a party generally will be required to establish that performance is truly impossible rather than merely impracticable.[6] In many force majeure cases, nonperformance will not be excused if it is merely financially or economically more difficult to satisfy contractual obligations.[7] Some jurisdictions, however, may only require that performance be impracticable, and some contracts may set a different standard (e.g., performance is “inadvisable”).[8] As a result, companies should closely scrutinize both the language of their force majeure clauses and the applicable law when considering their obligations and potential nonperformance risks.
Impact of COVID-19 on “Force Majeure” Clauses
The coming weeks and months will bring many assertions of force majeure in response to quarantines, business closures, and travel restrictions. Whether such assertions of force majeure will be successful will be heavily dependent on the facts relevant to the particular contracts and businesses at issue.
It is virtually certain that economic and business impacts of the type seen already in China, Korea, Italy, and Japan will spread to other jurisdictions. In response to this, companies—wherever their operations—should be taking proactive steps to ensure continuity of operations sufficient to meet existing contractual obligations and be evaluating whether their counterparties are also taking steps such that they will not have the need to invoke force majeure.
Taking affirmative steps now is especially important given the ability that companies currently have to foresee and attempt to mitigate any potential operational impacts in advance of the outbreak spreading to any new locality. Ideally, businesses will be able to plan accordingly to avoid any disruptions in their operations if the virus continues to spread.
Examples of steps companies might actively consider taking now (and seek to ensure that counterparties are taking) include: securing alternate supply streams in the event a supplier’s operations are impacted; planning for how employees can continue working remotely, or how functions can be transferred to other locations, in the event of quarantines and business closures; and mitigating the impact of restricted travel both around the globe and within countries. Even if such steps are not successful in avoiding the need to declare a force majeure, a company’s attempt to mitigate its risk in advance will be highly relevant to a court’s determination of whether reasonable steps were taken to continue to satisfy contractual obligations, and whether performance was truly impossible. Affirmative measures to help ensure a company is prepared for the possibility of business interruption resulting from COVID-19 include a careful review of insurance policies that may cover such an event.
Business Interruption Insurance
Business interruption insurance is intended to cover losses resulting from interruptions to a business’s operations, and generally covers lost revenue, fixed expenses such as rent and utility, or expenses from operating from a temporary location.[9] While these policies most frequently relate to physical property damage, businesses should nevertheless assess their coverage to determine whether they might be covered for losses due to business interruptions resulting from COVID-19.
Several companies were able to recoup losses through business interruption insurance for various operational disruptions after the global outbreak of Severe Acute Respiratory Syndrome (SARS) in 2002-2003.[10] In turn, however, many insurers have now excluded viral or bacterial outbreaks from standard business interruption policies.[11]
• In considering the applicability of force majeure, courts look to whether: (1) the event qualifies as force majeure under the contract; (2) the risk of nonperformance was foreseeable and able to be mitigated; and (3) performance is truly impossible. The court’s inquiry largely focuses on whether the event giving rise to nonperformance is specifically listed as a qualifying force majeure in the clause at issue. [12] Even if a party can surmount this requirement, it cannot invoke force majeure if: (1) it could have foreseen and mitigated the potential nonperformance,[8] and (2) performance is merely impracticable or economically difficult rather than truly impossible[9] (unless the specific jurisdiction or contract at issue specifies a different standard). [13] Recent COVID-19 developments may impact whether the outbreak and/or its effects constitute force majeure.
Washington Specific Case Law on Force Majeure
Washington follows the objective manifestation theory of contracts, meaning courts “impute an intention corresponding to the reasonable meaning of the words used[,]” and “give words in a contract their ordinary, usual and popular meaning unless the entirety of the agreement clearly demonstrates a contrary intent.” Hearst Communications, Inc. v. Seattle Times Co., 154 Wn.2d 493, 503-04, 115 P.3d 262 (2005). Thus, courts “do not interpret what was intended to be written but what was written.” Id. at 504. Consequently, if contracting parties agree that contractual performance, delays or increased costs will be excused if they are caused by certain events (whether defined as a force majeure, or otherwise), those agreements will be enforced as written, and Washington courts will generally not infer or impute additional terms or meaning to the parties’ agreement.
In Hearst, the Washington Supreme Court was tasked with interpreting a force majeure clause between the Seattle Post-Intelligencer and the Seattle Times, which provided as follows:
Neither party shall be liable to the other for any failure or delay in performance under this Agreement, occasioned by war, riot, government action, act of God or public enemy, damage to or destruction of facilities, strike, labor dispute, failure of supplier or workers, inability to obtain adequate newsprint or supplies, or any other cause substantially beyond the control of the party required to perform.
Id. at 507 (emphasis added). Applying Washington’s rules of contract interpretation, the Court noted that the “force majeure clause provides a complete defense to liability if one party is unable to perform its obligations under the contract because of circumstances outside its control, such as a labor strike.” Id. Thus, the Court held that the clause “provides a defense to liability when a party is required to perform, fails to do so, and that failure is caused by a strike or other event within its scope.” Id. (emphasis added). While Hearst did not involve a health pandemic nor a construction contract, the decision shows that Washington Courts will first look to the parties’ written agreement to determine who bears the risk of delays and liability caused by unforeseen conditions such as COVID-19. Therefore, the first question that must be answered for assessing COVID-19 risks is what does the contract say with respect to the occurrence of a force majeure or unforeseen condition?
For example, the 2017 AIA A201 form contract provides, in pertinent part:
• 8.3.1 If the Contractor is delayed at any time in the commencement or progress of the Work by . . . (4) by industry-wide labor disputes, fire, unusual delay in deliveries, governmental delays (including permit delays not caused by the Owner), unavoidable casualties, or other causes beyond the Contractor’s control; . . . then the Contractor shall reasonably attempt to mitigate the delay, and the Contract Time shall be extended by Change Order for such reasonable time, limited to the actual change in the critical path and Project duration caused thereby, as the Architect and the Owner may determine consistent with the provisions of the Contract Documents.
Here, COVID-19 is undoubtedly “a cause beyond the Contractor’s control” and entitles the Contractor to an extension of time for critical path delays caused by COVID-19. Notably, the term “force majeure” does not appear anywhere in the A201 form contract. Yet, the A201 expressly contemplates that delays caused by typical force majeure events, along with any other cause beyond the control of the contractor, will be excused.
Conversely, the contract may expressly limit the categories of events that provide for an excusable delay through such language as “if Contractor is delayed in the performance of the Work by reason of, and only by reason of . . . .” In this scenario, if events such as pandemics, disease or public health emergencies are not enumerated, then the contractor (or party responsible for timely performance) bears the risk of delays caused by COVID-19.
Last, the contract may delineate a number of excusable delay events without the type of catchall provision seen in the A201 form contract (e.g. “causes beyond contractor’s control”), and without the type of limiting language used in the example above (e.g “by reason of, and only by reason of”).[1] In this scenario, Washington Courts will apply the maxim of ejusdem generis, which provides that “a general term used in conjunction with specific terms will be deemed to include only those things that are in the same class or nature as the specific ones.” Viking Bank v. Firgrove Commons 3, LLC, 183 Wn. App. 706, 716, 334 P.3d 116 (2014). This leads to a much more difficult issue of interpretation if the force majeure provision, or similar clause, enumerates certain categories of events that are not the same class or nature as COVID-19. While COVID-19 is of a similar class and nature as “pandemic,” or “disease,” and (arguably) “acts of god,” it is unlikely that a Court will find that COVID-19 is of the same class and nature as “labor strikes,” “war” or “terrorism.” Further, force majeure provisions rarely specify “disease” or “pandemic,” which means there is much more uncertainty under Washington law for force majeure provisions that do not contain a catchall provision or limiting language. Under this scenario, whether a party is excused from liability or performance must be determined on a case-by-case basis.
What if my Contract Does not have this provision?
As noted in the A201 example in Section A above, construction contracts do not always use the term “force majeure,” nor is this term required. However, it is also possible that a construction contract does not contain any provision or language that addresses the parties’ respective liability or relief for unforeseen circumstances that prevent contractual performance. Under such circumstances, the doctrine of impossibility may provide relief to the party who can no longer perform its contractual obligations due to COVID-19.
Washington, along with most jurisdictions, recognizes the doctrine of impossibility, which “discharges a party from contractual obligations when a basic assumption of the contract is destroyed and such destruction makes performance impossible or impractical, provided the party seeking relief does not bear the risk of the unexpected occurrence.” Tacoma Northpark, LLC, 123 Wn. App. 73, 81 (2004). Therefore, if a contractor, subcontractor, or supplier agrees to furnish labor, materials or equipment for the construction of a project, but is no longer able to do so due to COVID-19, they may rely on the doctrine of impossibility to avoid their contractual obligations and liability for non-performance.
However, as noted in Tacoma Northpark, the doctrine of impossibility is not available if the party seeking relief bears “the risk of the unexpected occurrence.” Id. Likewise, the doctrine of impossibility does not excuse performance “merely because it became more difficult or expensive than originally anticipated to keep contractual obligations.” Id. Consequently, if a contract contains a force majeure clause, or similar provision addressing delays caused by unforeseen conditions, it is highly unlikely that a contractor, subcontractor or supplier can successfully rely on impossibility to excuse its performance obligations. By agreeing to categories of events that will excuse a contractor’s performance through a force majeure clause, the contracting parties have made a clear and deliberate allocation of risk for unforeseen circumstances that may affect the contractor’s ability to perform. If COVID-19 is not captured within the force majeure clause (either expressly or via ejusdem generis), the contractor bears the risk of this unforeseen event.
Thus, the doctrine of impossibility will only relieve the contractor from its contractual obligations and liability for non-performance if the contract fails to address delays caused by unforeseen circumstances.
General Contract Defenses
An affirmative defense does not contest the primary claims or facts (for example, that there was a breach of contract), but instead asserts mitigating facts or circumstances that render the breach claim moot. In other words, it is like saying, “Even if I breached the contract, the other party should not win the lawsuit.” For example, let’s say that Dodd, a teenage singer, fails to show up for a concert and is accused of breaching his contract to provide entertainment services. Regardless of whether he breached the agreement, Dodd may assert the affirmative defense that he lacked the capacity to enter into the contract in the first place because he’s a minor.
Some of the most common defenses are listed below.
• The contract was supposed to be in writing. If the other side argues that an oral agreement should be enforced against you, you may be able to defend yourself by claiming that a state law (known as the “Statute of Frauds”) requires the type of contract — for example, for the sale of real property — to be in writing.
• The contract is indefinite. If the essential terms were never agreed upon, you may be able to defend by arguing that the contract is indefinite. This means either the parties did not consider the deal to be final or that a court could not discern the essentials, even by implication.
• There is a mistake. You can defend yourself by proving that a mutual mistake was made as to an essential fact in the contract.
• You lacked capacity to contract. If you lacked capacity (that is, you couldn’t understand what you were doing when you entered into the deal, as discussed in the example above), the contract may be voidable. This defense is most likely to succeed in the case of minors and those with mental incapacities.
• You were fraudulently induced to enter into a contract. A contract will be invalid if it was induced by lies or under duress.
• The contract is unconscionable. A contract won’t be enforced if it is grossly unfair.
• Estoppel. When one party makes a statement excusing performance of the agreement and the other party relies on that statement, the first party may be prevented from later denying that statement and claiming a breach.
• The contract is illegal. A contract is unenforceable if its object or the thing bargained for is illegal.
Other Considerations
What constitutes sufficient notice?
• Force majeure provisions generally require that the party asserting excuse of performance notify the counterparty of the relevant force majeure event(s) and provide required support. Some contracts contain detailed procedures and timelines for such notice. Some states require strict compliance with the notice provision in the contract when providing notice of force majeure.
How does a party prove that it attempted to mitigate or avoid the force majeure event?
• If an event qualifies as force majeure and proper notice was given to the counterparty, a party relying on force majeure may still be found liable for not mitigating the harm derived from the non-performance of its obligations. The extent of the mitigation requirement is fact-specific and will depend on the language of the provision as well as applicable law and the facts.
What other possible remedies are there
Liquidated Damages
The presence of a Force Majeure clause in a contract may help to defeat a party’s claim for liquidated damages for non-performance of contractual obligations. But fights over contractually-specified liquidated damages are certain to abound as cancellations continue to occur as a result of the current pandemic. This is especially true as it relates to contracts without Force Majeure clauses. Generally, a liquidated damages clause will be enforced if: 1) damages are difficult to estimate at the time of contracting; and 2) the liquidated damages amount is reasonable and is not, in essence, a penalty imposed upon the breaching party. Thus, being able to successfully invoke a Force Majeure clause to excuse a party’s contract performance can have significant, positive financial ramifications for the non-performing party.
This is one of the most uncertain times in modern history and with that uncertainty comes the need for dedicated legal services and ardent representation. Each case is unique and you should contact the experienced attorneys at Late Knight Legal for a formal consultation to obtain proper legal advice.
Citations
1 Tracy Bateman et al., 77A Corpus Juris Secundum, Sales § 370 (describing a force majeure clause as a provision that “may have the effect of excluding nonperformance arising out of certain causes as unforeseeable or beyond the parties’ reasonable control or specified by the contract”); Marie K. Pesando, American Jurisprudence 2d, Act of God § 13.
2 Coronavirus Deals Blow to Global Business, Wall St. J. (Feb. 28, 2020 5:11PM), https://www.wsj.com/articles/coronavirus-deals-blow-to-global-business-11582919791.
3 See Richard A. Lord, 30 Williston on Contracts § 77:31 (4th Ed.) (“What types of events constitute force majeure depend on the specific language included in the clause itself.”).
4 See, e.g., Kel Kim Corp. v. Cent. Mkts., Inc., 70 N.Y.2d 900, 902 (1987) (holding that force majeure defense is narrow and excuses nonperformance “only if the force majeure clause specifically includes the event that actually prevents a party’s performance”).
5 See Lord, supra note 3, § 77:31 (noting that a party seeking the benefits of a force majeure clause must show that performance is impossible “in spite of skill, diligence, and good faith” to continue to perform).
6 See In re Cablevision Consumer Litig., 864 F. Supp. 2d 258, 264 (E.D.N.Y. 2012) (noting that, under New York law, force majeure clauses are “construed narrowly and will generally only excuse a party’s nonperformance that has been rendered impossible by an unforeseen event”).
7 See Lord, supra note 3, § 77:31 (“Nonperformance dictated by economic hardship is not enough to fall within a force majeure provision.”); Bateman et al., supra note 1, § 370 (“Inability to sell at a profit is not the contemplation of the law [of] a force majeure event excusing performance and a party is not entitled to declare a force majeure because the costs of contract compliance are higher than it would have liked or anticipated.”).
8 See, e.g., Facto v. Pantagis, 390 N.J. Super. 227, 231 (2007) (“A force majeure clause, such as contained in the [defendant’s] contract, provides a means by which the parties may anticipate in advance a condition that will make performance impracticable.”); OWBR LLC v. Clear Channel Comms., Inc., 266 F. Supp. 2d 1214, 1216 (D. Haw. 2003) (noting that the force majeure clause excused nonperformance where it was “inadvisable, illegal, or impossible”).
9 Covering Losses with Business Interruption Insurance, Insurance Information Institute (last visited Mar. 1, 2020), https://www.iii.org/article/covering-losses-with-business-interruption-insurance; Jing Yang, Why Many Businesses will be on the Hook for Coronavirus Losses, Wall St. J. (Feb. 21, 2020 6:00AM), https://www.wsj.com/articles/why-many-businesses-will-be-on-the-hook-for-coronavirus-losses-11582282802.
10 Yang, supra note 9.
11 Noor Zainab et al., Many Global Firms, Excluded from Epidemic Insurance, Face Heavy Coronavirus Costs, REUTERS (Jan. 29, 2020 6:30AM), https://www.reuters.com/article/us-china-health-insurance/many-global-firms-excluded-from-epidemic-insurance-face-heavy-coronavirus-costs-idUSKBN1ZS1CU; Yang, supra note 9 (“Now insurers across the board exclude epidemics in standard business-interruption policies, which mainly cover property damage from events such as fire, terrorism and natural catastrophes.”)
12 See, e.g., Richard A. Lord, 30 Williston on Contracts § 77:31 (4th Ed.) (“What types of events constitute force majeure depend on the specific language included in the clause itself.”); Kel Kim Corp. v. Cent. Mkts., Inc., 70 N.Y.2d 900, 902 (1987) (holding that force majeure defense is narrow and excuses nonperformance “only if the force majeure clause specifically includes the event that actually prevents a party’s performance”).
13 See Lord, supra note 7, § 77:31 (noting that a party seeking the benefits of a force majeure clause must show that performance is impossible “in spite of skill, diligence, and good faith” to continue to perform).
14 As noted by the Ninth Circuit Court of Appeals, “[t]he maxim of ejusdem generis, however, is inapplicable where the contract language is unambiguous,” F.T.C. v. EDebitPay, LLC, 695 F.3d 938, 944 (9th Cir. 2012). Thus, Courts will not apply this principle if the excusable delay events are expressly limited to the enumerated categories.
15 [2] Under Washington law, “there is in every contract an implied duty of good faith and fair dealing that obligates the parties to cooperate with each other so that each may obtain the full benefit of performance.” Rekhter v. State, Dep’t of Soc. & Health Servs., 180 Wn. 2d 102, 112, 323 P.3d 1036 (2014).
16 See also https://www.seattletimes.com/seattle-news/politics/inslee-orders-temporary-stop-to-evictions-other-help-for-workers-and-businesses-in-response-to-coronavirus/