Limiting Construction Risk From the COVID-19 Outbreak Through Force Majeure Clauses
Many in the construction industry may be concerned with the widespread effects of COVID-19 as it relates to fulfilling their contractual duties and obligations. In this new environment, force majeure clauses (French for “superior force”) will bear heightened scrutiny.
Pursuant to Governor Andrew M. Cuomo’s “New York State on PAUSE” Executive Order No. 202.6, New York State has to date exempted certain construction activities from its list of nonessential industries. Where a project has to be postponed or halted as a direct result of COVID-19, a force majeure clause can potentially eliminate or limit contractor liability for delays or nonperformance.
The term “force majeure” refers to an event such as an “act of God” that is beyond the parties’ reasonable control, not due to any party’s fault or negligence and that intervenes to create contract impossibility. A force majeure clause is a contract provision which may excuse contract nonperformance under certain circumstances. Not every type of risk can be anticipated and allocated during contract construction. Typical force majeure events include hurricanes, famine, earthquakes, floods, terrorism, government orders, explosions, war and wildfires. Burden of proof rests with the nonperforming party seeking to trigger the clause and excuse its nonperformance for COVID-19 related reasons, to establish that each of these three requirements is met.
“Beyond the control of the contracting parties” has been applied narrowly; the circumstances are limited to events that make performance objectively impossible. “Mere impracticability or unanticipated difficulty is not enough to excuse performance.”[i] The underlying inquiry is whether the contractor seeking to rely on the clause could have anticipated the event in the course of contract development. This inquiry will be of first impression in connection with COVID-19 and is analyzed further below. The often-cited United Supreme Court case, United States v. Brooks-Callaway Co. No. 366 (1943) remains instructive. The U.S. Supreme Court found a force majeure clause inapplicable where 183 days of delay were attributable to high water that ultimately resulted in a flood; thus the Supreme Court found not every fire or flood qualifies even if they are listed in a force majeure clause as a qualifying event. It depends rather on the foreseeability of the fire or flood.
Historically, force majeure clauses have been applied to “acts of God” defined as an extraordinary interruption due to a natural cause (such as a flood or hurricane) that experience, prescience, or care could not reasonably foresee or prevent[ii]. An epidemic disaster constituting a force majeure event has not been scrutinized in detail by many United States jurisdictions. Whether COVID-19 triggers the force majeure clause is a question of first impression. New York courts prefer strict interpretation of contract clauses.[iii] Where there is a “catchall phrases” in the force majeure clause, i.e. the addition of general language such as “any other cause beyond the reasonable control of the [Contractor]” the precept of ejusdem generis as a construction guide is often applied.[iv] Under this principle, terms constituting general language of excuse are not to be given the most expansive meaning possible, but are held to apply only to the same general kind or class as those specifically mentioned. (Black’s Law Dictionary 464 [5th ed].[v] In other words, if the event cannot fit into any of the categories enumerated in the force majeure clause deemed to be a qualifying event, under this principle, a catchall phrase cannot be used as protection.
Under New York law, force majeure clauses are given a narrow strict reading in accord with their purpose, which is “to limit damages in a case where the reasonable expectation of the parties and the performance of the contract have been frustrated by circumstances beyond the control of the parties.[vi] New York courts are extremely reticent to interfere with contract provisions. “When the parties have themselves defined the contours of force majeure in their agreement, those contours dictate the application, effect and scope of force majeure.[vii] They refuse to interpret enumerated terms in the clause broadly and give narrow construction even to catchall phrases.
Often included in force majeure clauses is a notice requirement, which sets a manner and time for the nonperforming party to alert the other party after realizing that a force majeure event has occurred which will prevent it from performing. If not specified, notification should be as soon as possible. Where notice mandates exist, the nonperforming party must comply before seeking excuse from performing under the contract.[viii] There may also be further contract requirements that must be taken into consideration when invoking force majeure, such as whether the contract allows for extensions of time to perform or the duty to mitigate the impact of the nonperformance.
If the contract in question does not contain any clause excusing delays in certain situations, some jurisdictions including New York State do recognize the Doctrine of Impossibility i.e. a party cannot perform due to an event that could not have been foreseen when the contract was negotiated. A party’s performance may be excused only where the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Additionally, a party pleading impossibility “must demonstrate that it took virtually every action within its powers to perform its duties under the contract.”[ix] Impossibility is rarely applied to excuse contractual obligations under New York law.[x] This doctrine is narrowly construed due in part to judicial recognition that the purpose of contract law is to allocate the risks that might affect performance and performance should be excused only in extreme circumstances. New York courts are therefore resistant towards discharging parties from their contractual obligations.
Another defense that may be available to excuse performance in certain very limited circumstances is the frustration of purpose doctrine. For the doctrine to apply the purpose behind the contract has to be frustrated and the performance of the contract must be rendered impossible. To determine the “purpose” behind the contract, courts delve into the objective intent the contractual parties shared when entering into it. This is a fact intensive inquiry. As with force majeure and impossibility of performance doctrine, an unforeseeable event that results in lower profits is insufficient to justify application of the doctrine of frustration. In addition, the party seeking to invoke the doctrine must not be at fault for the inability to perform its contractual duties that they are seeking to discharge.
Ripple effects may be felt in the construction industry from the COVID-19 crisis for many months to come and contractors may seek relief from contractual obligations as a direct result of the epidemic. Indeed, contractors are already enduring difficulties in fulfilling their duties. As this article highlights, whether or not force majeure or another doctrine excusing performance will allow a contracting party to excuse performance is heavily fact dependent. Contracting parties should seek the advice of legal counsel to assist in determining how to allocate or avoid risk through the wording of contracts as well as evaluating existing contract provisions.
Sana Suhail is a partner in the New York office of Lewis Brisbois Bisgaard & Smith and a member of the Construction and General Liability Practices.
[i] Philbro Energy, Inc. v. Empresa De Polimeros De Sines Sarl, 720 F.Supp. 312, 318 (S.D.N.Y.1989)
[ii] Earliest known definition in New York courts of an “Act of God” is in the 1839 matter of McArthur & Hurlbert v. Sears (21 Wend. 190) where the New York Supreme Court defined it simply as “something in opposition to the act of man”.
[iii] In Reade v. Stoneybrook Realty LLC 63 AD3d 433, 882 NYS2d 8 (1st Dept. 2009) the Court concluded that a TRO issued by Supreme Court, which prohibited the continuation of construction by landlord, was governmental action beyond the control of the landlord and thereby included in the “government prohibitions” phrase in the rent abatement clause in the lease.
[iv] Krulewitch v. National Importing & Trading Co., 195 App Div 544, 546.
[v] Team Mktg. USA Corp. v. Power Pack LLC 41 AD3d 939 (3rd Dept. 2007). In Team Mktg the Court held that where none of the specifically enumerated events in the clause at issue – strikes, boycotts, war, Acts of God, labor troubles, riots, and restraints on public authority – are similar to in nature to the defendant’s actions in rescheduling or cancelling the promotion schedule, the “catchall” provision did not trigger the force majeure clause.
[vi] (United States Equities Co. v. First Natl. City Bank, 52 AD2d 157, 383 NYS2d (1st Dept. 1976)
[vii] (Route 6 Outparcels, LLC v. Ruby Tuesday Inc. 88 AD3d 1224 (3d Dept. 2011))
[viii] Toyomenka Pac. Petroleum, Inc. v. Hess Oil Virgin Is. Corp., 771 F.Supp. 63, 67 (S.D.N.Y. 1991) “Under New York law, a contractual duty will not be construed as a condition precedent absent clear language showing that the parties intended to make it a condition.”
[ix] Kama Rippa Music, Inc. v. Schekeryk, 510 F.2d 837, 842 (2d. Cir. 1975)
[x] . Lagarenne v. Ingber, 273 A.D.2d 735, 710 N.Y.S.2d 425, 428 (N.Y. App. Div. 2000)