Since the start of the Coronavirus pandemic, we have been anticipating a wave of litigation over the interpretation of contractual force majeure clauses. It is now upon us.
Force majeure is a concept by which a party may be excused from nonperformance of its obligations where it is the result of unforeseen circumstances beyond its reasonable control. The triggering circumstances typically include a laundry list of so-called “acts of God” ranging from floods, fires and severe weather to strikes, riots, war, famine and civil unrest.
This is one of those “wild west” areas of the law. It is not that force majeure as a concept is unknown to lawyers. In fact, such clauses commonly appear in commercial contracts. That’s the point: they are boilerplate, largely untested and relegated to those unlikely “what if” scenarios (“You’re saying, what if something akin to martial law is declared and the government forces businesses to close against their will? You mean in the United States of America?”)
Earlier this month, retail developer Pacific Collective, LLC sued in Los Angeles Superior Court and invoked force majeure contending that Covid-19 prevented it from completing a $4.2 acquisition of a Culver City property from ExxonMobil Corp. Pacific’s position is that it could not bring in inspectors, architects and others to redevelop the property and it sought to extend the closing of the acquisition from March to May, which Exxon refused. The suit, styled as a breach of written contract, specific performance and declaratory relief, seeks millions in damages and to prevent Exxon from selling the property to any other buyers.
Most of the literature on force majeure focuses on the specific contractual language and an inquiry into (a) whether the force majeure clause includes the applicable triggering event, i.e., here, whether it lists “pandemic” or “disease” or similar; and (b) if it does not, whether the coronavirus pandemic and emergency orders will fall under catchall language such as “other acts of God.”
However, there is reason to believe that California courts will be less focused on contractual language than the courts of New York, Delaware and other states. In other words, California judges will likely take a more liberal approach in in interpreting force majeure. This is because force majeure principles appear in California statutory law. California Civil Code, section 3526, states that “no man is responsible for that which no man can control.” Similarly, California Civil Code, section 1511, provides that “[t]he want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused … [w]hen it is prevented or delayed by an irresistible, superhuman cause … unless the parties have expressly agreed to the contrary[.]” In other words, unless the parties have specifically contracted otherwise, nonperformance is excused in the case of prevention by a “irresistible” or “superhuman” cause.
Meeting the above standards may be equivalent to so-called “impossibility” or it may be somewhat less stringent. If the latter is the case, parties to a contract may be grateful for (or regret) provisions in their agreement providing for choice of law and jurisdiction in California.
The above questions will not have to wait long as attorneys are expecting additional suits involving force majeure to hit the courts within a matter of weeks.
If you would like to discuss how these new developments may affect your business or contracts, please reach out to me at laine@eanetpc.com or (310) 997-4185.