By Olen Lenets, Attorney at Rose Law Group
With businesses’ economic viability at risk because of the necessary measures the public is taking in hopes of combating the unprecedented threat of the COVID-19 virus, a rare contractual provision is likely to take center stage in many future (telephonic) court proceedings.
The provision, often included in contracts through boilerplate language, is known as the force majeure clause. Arizona Revised Statutes have defined force majeure as “an act of God or of nature, a superior or overpowering force or an event or effect that cannot reasonably be anticipated or controlled . . .” A.R.S. § 33-801. Arizona courts have also mused on the subject, though in a very limited capacity. One court defines force majeure as “an equitable legal principle pursuant to which a party to a contract whose performance has been made physically and/or economically impossible (or at least impracticable) due to circumstances totally beyond his control, can be given certain types of relief.” Russo v. Barger, 239 Ariz. 100, 102, ¶ 5, 366 P.3d 577, 579 (App. 2016).
Because of the power a force majeure clause holds, courts will read these provisions narrowly. When a contractual provision is interpreted narrowly by a court, specificity is key. Most existing contracts likely do not sufficiently outline impossibility or impracticability of performance by one or both parties because of a worldwide viral pandemic such as COVID-19.
A common force majeure clause will touch on general unexpected acts of nature or acts by governing authority. More often than not, it will be loosely tailored for catastrophic regional events such as earthquakes, hurricanes, or civil unrest/war. The impact of COVID-19, therefore, even on a global scale, is probably outside of the narrow lens courts will use to examine these provisions. Certainly, some force majeure provisions will discuss impossibility or impracticability of performance due to executive orders – likely then the duties to perform under the contract would be impacted by the local and nationwide responses to this virus.
Even so, impossibility and impracticability still have very high bars for proof. Financial hardship or the requirement of additional resources to perform under the contract are not enough. A party seeking to avoid performance must show that to perform would be objectively impossible, not simply unfavorable or difficult. The same goes for commercial impracticability. Arizona courts have said that to use the doctrine of commercial impracticability a party must be able to demonstrate that performance under the contract requires, “so much beyond the parties’ contemplation that it becomes an exercise in commercial futility.” Willamette Crushing Co. v. State By & Through Dept. of Transp., 188 Ariz. 79, 83, 932 P.2d 1350, 1354 (App. 1997).
Government mandated shutdowns or lockdowns definitely go a long way to effectively utilizing these doctrines, but impossibility and impracticability are far from surefire defenses to performance in the absence of a strong force majeure provision.
Currently, parties faced with economic hardships as a result of the COVID-19 virus should communicate their concerns about performance to the parties they share privity of contract. Dutiful efforts to mitigate damages now will prove beneficial and maybe help the parties ultimately avoid litigation.
Going forward, expect contracting parties to have learned from this unique worldwide phenomenon and anticipate future force majeure provisions in contracts to move away from boilerplate language and be narrowly tailored to provide protections to encompass this sort of situation.
