By Erika Levin

Law360 (October 9, 2020, 2:23 PM EDT) --

Erika Levin

In the months since having been declared a pandemic by the World Health Organization on March 11, COVID-19 continues to wreak havoc on commercial relationships across the globe.

Parties to international contracts facing impediments caused by COVID-19 have relied on force majeure as a refuge from their contractual obligations. Since the onset of the crisis, much has been written about whether the pandemic would fall within the boundaries of a typical force majeure clause.

But as COVID-19 persists and the world is forced to adapt to this new situation, how will reopening efforts and the protracted nature of COVID-19 affect international commercial contracts that are governed by New York law?

Now that the virus has spread across the globe, people and businesses — particularly those dealing with international contracts — are navigating a new economic and regulatory landscape. This new landscape is ever shifting, with states and countries reopening in fits and starts; governments passing regulations that affect work force availability, labor conditions and contractual obligations; and a consumer base whose priorities shift as fluidly as the virus does.

Existing case law regarding force majeure provides some guidance, but admittedly the prior analogs are somewhat imperfect. Unlike other force majeure-triggering events — like a terrorist attack or a natural disaster — the crisis is ongoing and, like the virus itself, novel. No one knows when it will truly end or what the new normal will look like when it does.

Despite the many areas of uncertainty, New York courts are clear on one point: A force majeure clause is to be construed as narrowly as possible. Under New York law, a party will be excused from its nonperformance only by events enumerated and contemplated by the contract at issue since it is presumed that the parties' contract dictates their obligations and risk allocations.[1]

And even then, performance is not excused if the impediment is temporary in nature and/or within the sphere of control of the nonperforming party. Importantly, New York jurisprudence is loath to excuse performance on purely economic grounds.[2]

Thus, in order to benefit from a force majeure exemption of any sort, the party will have to sufficiently demonstrate both how the claimed impediment was specifically included within the contract's force majeure and impossibility provisions and that the triggering event itself, rather than an accompanying side effect, was the actual cause of the party's inability to perform.[3]

If a force majeure clause is unlikely to be invoked effectively, what can parties do to protect themselves if COVID-19 and related conditions make it difficult for them to fulfill their contractual obligations?

First, parties should closely monitor the facts and situation at hand and thoroughly analyze their position with respect to the contract and the applicable law, including understanding how related subcontracts may affect them. In particular, emphasis should be placed on compliance with any applicable procedural requirements and/or conditions precedent[4] that are imposed, such as notice obligations.

In addition, those seeking exemption based on force majeure should also carefully analyze both the contractual rights and remedies available to them as well as to their counterparty (e.g., default, termination, indemnity, insurance, dispute resolution, etc.).

In particular, an assessment as to the likelihood and strength of their counterparty's termination rights will be important, as courts and tribunals tasked with resolving these issues will have to address whether the contract can or should be terminated and whether the counterparty should be obliged to accept delayed performance.

Parties should approach their decisions with respect to performance and termination carefully in order to avoid a subsequent determination that their actions were somehow in breach of their contract. Given the narrow construction of force majeure under New York jurisprudence, the more prepared a party is at evaluating these risks, the more successful it will be in averting losses and preparing for necessary workarounds.

Second, now more than ever, parties should be proactive and establish clear channels of communication with their partners in a contractual relationship. Rather than waiting for pandemic conditions to rise to a crisis, parties should anticipate dealing with an uncertain landscape and set expectations and form relationships that allow maximum flexibility.

Parties should work with each other as best as they can to resolve COVID-19-related issues prior to resorting to termination under force majeure. Parties should also evaluate to what extent other laws[5] and/or legal theories[6] may come into play.

Third, and to the extent possible, parties should pay close attention to the drafting and/or redrafting of their contracts to account for force majeure, avoiding boilerplate language when possible. Even before the pandemic, it was apparent that New York law strictly construed contractual force majeure clauses and that a force majeure clause would not be read into a contract when it did not appear within the plain text of the contract.[7]

Moving forward, a party would be wise to tailor contractual language to specifically address the evolving pandemic. For example, a few weeks ago a court approved a purchase agreement to resolve the bankruptcy of a well-known clothing retailer, Lucky Brand Dungarees Inc.

Notably, the agreement included highly specific clauses specifically addressing "the novel coronavirus" and deviations from the ordinary course of business as are reasonably necessary to protect health and safety and respond to disruptions caused by the pandemic.[8]

Additionally, parties in the process of drafting and redrafting their force majeure clauses should seek to address what happens after force majeure notice has been given and how long performance should be excused before restarting or terminating is appropriate.[9] Any party in the process of negotiating a contract in the middle of COVID-19 would be wise to consider inclusion of specific language that anticipates and protects its position.

Conclusion

Resolution of the challenges posed by the continued impact of COVID-19 will require a thoughtful case-by-case analysis of the situation at hand. To the extent that multiple jurisdictions are at play, an evaluation as to the laws of the jurisdiction where your counterparty is headquartered and/or possesses its assets should also be conducted.[10]

Parties will likely have to reevaluate their business goals and decide whether extending excuse periods or outright termination of the contract will serve them best. Additionally, parties should take into consideration the forum which has been selected to resolve their dispute — recognizing that differences may exist with respect to their experience depending on whether they are litigating or arbitrating their dispute.

The key takeaway for parties is that while force majeure may exist as a safety net, its application will be narrow and vary widely depending on both the facts and specific contract involved. As such, parties should do their best to communicate and negotiate, employing mediation as necessary, with their counterparties to resolve impediments arising from COVID-19 as best as they can.

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Erika Levin is a partner at Lewis Baach Kaufmann Middlemiss PLLC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See Kel Kim Corp. v. Cent. Mkts., Inc. , 70 N.Y.2d 900, 902–03 (1987) ("Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party's performance will that party be excused"). See also In re Cablevision Consumer Litig., 864 F. Supp. 2d 258, 264 (E.D.N.Y. 2012) (force majeure clauses "are construed narrowly and will generally only excuse a party's nonperformance if the event that caused the party's nonperformance is specifically identified"); Belgium v. Mateo Prods., Inc., 29 N.Y.S.3d 312, 315 (1st Dep't 2016) (quoting Route 6 Outparcels, LLC v. Ruby Tuesday, Inc., 931 N.Y.S.2d 436, 438 (3d Dep't 2011)) (parties' agreement dictates the application, effect, and scope of force majeure).

[2] See Macalloy Corp. v. Metallurg, Inc. , 728 N.Y.S.2d 14, 14–15 (1st Dep't 2001) (plant shutdown was not a force majeure event because "financial hardship is not grounds for avoiding performance under a contract"); Route 6 Outparcels, 931 N.Y.S.2d at 438 (economic factors cannot excuse performance); Urban Archaeology Ltd. v. 207 E. 57th St. LLC , 951 N.Y.S.2d 84 (Sup. Ct.), aff'd, 891 N.Y.S.2d 63 (2009) (severe economic crisis not included in force majeure clause, which excluded parties' "financial hardship"). See also Barclays Bus. Credit, Inc. v. Inter Urban Broad. Of Cincinnatti, Inc. , No. 90 CIV. 2272 (MJL), 1991 WL 258751, at *8 (S.D.N.Y. Nov. 27, 1991) ("New York law is absolutely clear that 'where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, performance of a contract is not excused'").

[3] See id.

[4] See In re The Containership Co. , No. 11–12622–JLG, 2016 WL 2341363, at *10 (Bankr. S.D.N.Y. Apr. 29, 2016) (noting defendant's failure to provide "notice of the alleged force majeure conditions" and holding that performance was not excused.).

[5] While beyond the scope of this article, it bears noting that parties should also undertake an analysis to determine whether the Uniform Commercial Code ("UCC") or the UN Convention on the International Sale of Goods ("CISG") may be relevant to an analysis of a COVID-19 related impediment upon New York contracts that relate to the sale of goods. See UCC 2-615; CISG Art. 79. The CISG is part of New York law and will by default govern an international supply contract between parties from contracting states unless there has been an opt-out. See CISG Arts. 1, 9. 

[6] For contracts governed by New York law, UCC 2-615 (Excuse by Failure of Presupposed Conditions), UCC 2-609 (Right to Adequate Assurance of Performance), and the doctrines of impossibility and frustration of purpose may also come into play. However, the standards and burdens imposed upon a party invoking the doctrines of impossibility and frustration of purpose are quite high. See Kel Kim, 70 N.Y.2d at 902 ("Impossibility excuses a party's performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract."); Axginc Corp. v. Plaza Automall, Ltd. , No. 14-CV-4648 (ARR) (VMS), 2017 WL 11504930, at *9 (E.D.N.Y. Feb. 21, 2017) (internal citations omitted) (performance excused pursuant to frustration of purpose only where "an unforeseen event has occurred, which, in the context of the entire transaction, destroys the underlying reasons for performing the contract, even though performance is possible"); see also Harlow & Jones, Inc. v. Advance Steel Co. , 424 F. Supp. 770, 777–78 (E.D. Mich. 1976) (party should not – even in good faith – preemptively move to cancel a contract in anticipation of a delay because the "proper and more reasonable course of conduct" is to request an assurance of performance pursuant to UCC Section 2-609)).

[7] See The Connecticut Nat'l Bank v. Trans World Airlines, Inc. , 762 F. Supp. 76, 81 (S.D.N.Y. 1991) (finding that airline was not excused from performing its obligations to a creditor due to the war in the Middle East, fears of terrorism, and increased oil prices since these factors were foreseeable and airline had failed to protect itself by including a force majeure clause in the contract).

[8] In re Lucky Brand Dungarees, LLC , No. 20-11768 (CSS), 2020 WL 4698654, at *34 (Bankr. D. Del. Aug. 12, 2020) (also specifying length of time during which performance would be excused).

[9] See, e.g., the 2003 and 2020 ICC Force Majeure Clauses, available at available at https://iccwbo.org/content/uploads/sites/3/2017/02/ICC-Force-Majeure-Hardship-Clause.pdf. With respect to termination, it should be noted that the 2003 and 2020 versions of the ICC standard long form clauses differ. The 2003 standard clause allows termination by either party when the event substantially deprives the parties of what they were reasonably entitled to expect under the contract. To provide more certainty and foreseeability, the 2020 ICC force majeure clause notes that such deprivation occurs if the duration of the impediment exceeds 120 days. Notably, to avoid unjust enrichment after termination of the contract, both iterations of the ICC standard clause allow either party to recover the equivalent of the benefit it bestowed on the other party through partial performance prior to the termination. See Section 9 (Unjust Enrichment) of the 2003 and 2020 ICC Force Majeure Clauses; see also Haulage Enters. Corp. v. Hempstead Res. Recovery Corp., 74 A.D.2d 863, 863 (2d Dep't 1980) ("The contract provided for a termination procedure in the event that, inter alia, HEC fails to perform for five calendar days without curing such defect upon three days' notice. An exception to this termination clause is if nonperformance is caused by a force majeure (war, riot, act of God, etc.) or labor unrest. If the force majeure or labor unrest prevents performance for a period exceeding three continuous months, HRR may terminate.").

[10] Parties should also analyze the applicable law, including temporary measures legislation that has been enacted in other jurisdictions that are related to the contract. For instance, the Singapore COVID 19 Temporary Measures Act may affect an international party's ability to terminate a contract or seek redress with respect to a Singaporean entity if the Singaporean entity can establish that the necessary prerequisites are met. See https://sso.agc.gov.sg/Act/COVID19TMA2020.

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