Coronavirus and Contracts: What Did We Agree To?

I. Introduction

All across the country, agricultural producers, processors, food manufacturers, retail stores, landlords, tenants, lenders, borrowers, and others are pulling out their written contracts and examining the terms.  What, if any, terms address how operations may change or must continue in this current global pandemic?  What should you be thinking about if a buyer or supplier contacts you about canceling your contract?

The focus of this writing is to highlight what are often thought of by parties as “boilerplate” language, including force majeure clauses and other terms that are often included in contracts, yet not always understood or defined in the legal sense. The goal is to provide some insight into what to look for and what certain clauses in a contract mean, particularly today, in light of stay-at-home orders, business closures, market uncertainty, and designation of agriculture and food production as essential services. If you have a specific concern related to a contract or pandemic-related contract issues, we recommend contacting a lawyer to discuss your specific situation.

II. Force majeure

A common question being asked these days is, does your contract have a force majeure clause, and if so, when or how can it be triggered to relieve a party of its obligation to perform under the contract and not be subject to a breach of contract lawsuit?

First, it’s important to note that while many contracts may contain a “force majeure” clause that serves to excuse a party from performing its obligations under the contract for certain reasons that are deemed to be out of the party’s control, there is no standard force majeure provision. To the contrary, each clause is subject to negotiation between the parties. Each contract can be very different.

Because each clause and each contract is different, the precise words that are included in a particular force majeure clause must be examined to determine whether the clause has been triggered in any given situation. Courts have consistently held and explained that whether a force majeure clause serves to excuse a party’s contractual performance is fact specific.

There are typically three elements to asserting force majeure: 1) the force majeure event was beyond the reasonable control of the affected party, 2) affected party’s ability to perform was directly prevented by the intervening force majeure event, and 3) the affected party took all reasonable measures to avoid the force majeure event and tried to perform its obligations under contract.

While each force majeure clause is different, there are certain phrases or words that are commonly found in a force majeure clause.  Courts have analyzed these phrases or words in order to determine their meaning in the force majeure context. Contract terms and court interpretations vary, but we address a few examples here.

Act of God

A common phrase found within many force majeure provisions is “Act of God”. Some force majeure clauses go on to specifically describe what is meant by an Act of God, while others are silent on what the term means.  Again, while each clause and state law governing the dispute may lead to different results, many courts have limited this phrase to mean only those situations that were caused by forces of nature, such as a hurricane, wildfire, or tornado.

Epidemic, Pandemic, or National Emergency

Today, all parties are examining the force majeure clauses in their agreements to see if the clause includes any specific language regarding “epidemic, pandemic, or national event or emergency”. If the provision is included, even in today’s global pandemic, it is important to note that the entire force majeure clause must be read and analyzed to determine if the clause is, in fact, triggered simply because this language is included.

Impossible, Impracticable, Frustration of Purpose

The terms “impossible”, “impracticable”, or “frustration of purpose” are also commonly included in force majeure clauses, and, in some instances, a contract may be drafted in such a way that a section on “Impossibility”, “Impracticability”, or “Frustration of Purpose” is included in the contract, in addition to the force majeure provision. Court interpretations of these terms vary greatly. In the context of impossibility of performance, courts have generally been consistent that economic burdens are not enough to claim a force majeure defense. Some courts have expressly held that impracticality or economic loss or burden is not enough to use force majeure as a reason for not performing under the contract.  However, there are also some courts who have indicated that if a drop in demand is due to some “major, unpredictable event” or “unforeseen contingency which alters the essential nature of the performance”, or “all means of performance are commercially senseless”, then it might be a force majeure event that excuses a party from performing its contractual duties.

Government Action or Order

Many force majeure clauses also contain a provision that serves to excuse a party’s performance if a government action or order is the reason the party can’t meet its contractual obligation. Today, many are questioning if governmental restrictions, shut downs, or stay at home orders that result in businesses closing serve to excuse parties from fulfilling their contractual obligations.

Catchall Provision

In some force majeure clauses, a “catchall” provision is also included, such as “any other reason or any other event beyond such party’s control.” While tempting to point to this provision as one that would excuse a party’s performance for literally “any reason”, it is important to remember that courts have examined these types of provisions in contractual and force majeure disputes and the interpretations can vary widely. Many courts have held that the catchall provisions are limited to the types of events that were specifically listed and described in the force majeure clause immediately preceding the catch-all.

III. Notice

If a “force majeure event” has occurred, most force majeure clauses will require the party seeking to use force majeure as an excuse to not perform under the contract to provide the other party with notice of its intent to do so. It is important to examine a force majeure clause to see if a notice provision is included, and to strictly comply with the notice terms. If no specific time for notice is provided in a contract, courts tend to view a “reasonable’ time as sufficient.  Failure to provide notice as the contract requires can turn what is otherwise a force majeure event into a finding that non-performance of the contract was a breach of agreement.

IV. Causation

It is also very important to note that in order to relieve a party of its contractual obligation, a “force majeure event” (if it occurs and was included in the contract) must be the cause of the party’s inability to perform. Put another way, assume a contract contains the term “pandemic” in the force majeure clause. The current Covid-19 situation does not automatically mean that the parties to that contract with the word pandemic in it can claim “force majeure” and be relieved of the contractual obligations to perform. Any claimed event of force majeure must be the cause of the party’s inability to perform.

V. Impact of Essential Services Designation in the Food and Ag Space

Today, as it relates to the coronavirus pandemic and the changing commercial and social landscape, a major exception to the shelter in place and stay at home orders that have been issued by governmental authorities across the country is the continued operation of “essential services”. On March 19, 2020 the Department of Homeland Security identified the specific industries that are considered “essential” (available at https://www.cisa.gov/publication/guidance-essential-critical-infrastructure-workforce). While the CISA list is only advisory in nature, it has been utilized by state and local authorities in defining which industries and workers are deemed “essential”, and therefore allowed to continue to stay open and operate.

When we analyze contracts and whether a force majeure clause serves to excuse a party’s non-performance, one question that arises for essential industries such as agriculture and food is what impact, if any, does the “essential” designation have on subsequent attempts to invoke a force majeure clause and purported impossibility of performance?

While many contracting parties may look to a “government action” provision in a force majeure clause to prove that performance is now impossible due to a shelter in place or stay at home order, does an essential services designation, and the implied government requirement that an essential business stay open and operate, come into play in a party’s effort to force performance of the agreement?

But, notwithstanding the essential services designation, many of those industries (e.g., livestock production, oil and gas production) are nevertheless currently faced with erratic commodity markets and access to capital problems, which again raises the question of whether a party’s performance has been rendered impossible or impracticable and is excused due to force majeure.

VI. Termination Clause

Beyond the issue of force majeure and whether a party can use it as a reason to excuse performance, it is important to remember that most contracts include language allowing one or both of the parties to terminate the contract for a variety of reasons, including breach, a decision to contract elsewhere after a period of time, or for no reason at all with proper notice. Termination provisions almost uniformly require a set period of notice, such as 30 or 60 or 90 days, to allow for parties to make alternative arrangements.

Most contracts that include termination clauses will not allow for immediate termination without notice pursuant to that particular provision. Instead, most parties will need to look for alternative provisions within the contract, such as force majeure or temporary inability, that allow for immediate termination. In other cases, a party may assume the risk and simply breach a contract by terminating or refusing to perform, hoping that a recognized defense of breach might excuse its non-performance.  This however, is a risky endeavor, as legal excuses for breach are essentially based upon a limited set of hard-to-prove circumstances that largely claim a contract was never valid in the first place.

VII. Assignment

Another option to be considered by parties to a contract whose performance may be uncertain due to a variety of factors is whether that contract can be assigned to another party that can and will perform.  Many contracts include language regarding an “assignment”. Assignment of a contract is a process in which one party transfers its roles, rights, and obligations under a contract to a third party. Essentially, someone else takes on the original party’s role in a contract.

If your contract does not say anything about assignment, the general rule is that a party has the power to transfer contractual rights and obligations unless the contract specifically says otherwise. In short, the rule here is look at your contract to determine your rights and those of the other party when it comes to assignment. It is possible that the other party may be able to transfer its rights under the contract to a third party without providing notice to you in advance, requiring you to work with that third party to satisfy your obligations. Most contracts do require a producer to receive notice of an assignment, but that does not always mean that you have to be able to consent, or that you need to be provided that notice in advance of the assignment. If a contract is assigned to a third party, all the obligations and responsibilities and terms remain the same.

VIII. Dispute Resolution

In addition to terms governing parties’ performance and establishing permissible reasons for non-performance, most contracts will also have terms that dictate how a dispute over some portion of that contract is to be resolved. In legal parlance, what do the “dispute resolution” terms say? Have the parties agreed to waive a trial by jury? Did the parties agree to arbitrate all claims? If yes, was a particular arbitration system or set of rules adopted, i.e, AAA or a trade association arbitration panel? Did the parties agree to mediate all claims in lieu of, or in advance of, any arbitration?

If your contract requires a specific process, it is important to ensure that you determine what is required and what rules guide your claim. One thing that is important to note is that a formal dispute over a contract is not a quick process. Arbitration, negotiations, mediation, or litigation, all require a process that can take months, if not years, to reach a resolution. If this formal dispute process is your only option, it remains important to continue to seek arrangements to minimize your losses and determine new options or partners. In most situations, formal dispute resolution is a last resort. In situations that are unprecedented, uncertain, and difficult for all, it may be in everyone’s best interest if parties can work together to agree upon modifications, temporary or otherwise, to a contract and avoid termination. This may be an optimistic goal, but it is generally in everyone’s best interests to avoid litigation, to maintain relationships, and to keep a strong and adequate agricultural supply chain.  While circumstances are going to be different for everyone, the ability to negotiate, collaborate, and compromise may end in a better result in the long, and short, term.

IX. Conclusion

The COVID-19 outbreak is changing and evolving rapidly. Parties to a contract should review their contracts carefully in order to fully understand their rights and obligations, and consult with an attorney to discuss specific questions, concerns, and applicable state laws.