Force Majeure Clauses: Potential Relief From Coronavirus Disruptions for Washington Businesses
The COVID-19 crisis is impacting daily lives in devastating and sometimes unpredictable ways. Among these impacts is the massive disruption to business. Goods are not delivered timely, employees struggle to operate normally, etc. – all of which create circumstances where businesses will claim (legitimately or otherwise) to be unable to meet contractual commitments.
On January 21, 2020, the United States’ first documented COVID-19 case was found in Snohomish County, Washington. On February 29, Governor Jay Inslee declared a state of emergency in Washington—the first state to issue such an order. On March 11 and 13, Gov. Inslee issued separate emergency proclamations limiting large gatherings and announcing statewide school closures, respectively. On March 24, Gov. Inslee issued a “stay at home” order, requiring all residents to stay home unless employed by an essential business. A growing number of state and local governments across the country have also implemented unprecedented measures to try to control the spread of the virus.
Confronted with unprecedented public-health measures like these, one question facing many businesses is whether “force majeure” clauses – standard clauses in many commercial agreements – could be invoked to avoid liability for suspension or termination of performance. The answer in Washington, similar to other states, depends on (a) the language of the agreement, and (b) whether there is a sufficient link between the coronavirus outbreak and the parties’ inability to perform their obligations under the agreement.
Disputes over force majeure clauses start with the specific contract language. Washington follows the objective manifestation theory of contract interpretation. This means courts will attempt to determine the parties’ intent by focusing on the objective terms of the agreement rather than the parties’ unstated intentions. Courts will interpret contracts using the ordinary, usual, and popular meaning of the words used unless the agreement clearly demonstrates a different intent. While extrinsic evidence (e.g., prior drafts) may not be employed to vary or contradict the plain terms of a contract, courts may rely on more than one form of extrinsic evidence to determine the meaning of specific words or terms used where those words or terms are ambiguous.
Force majeure clauses vary from agreement to agreement, but typically they outline certain categories of events that the parties recognize would hinder full performance of a contract, the occurrence of which limits the invoking-party’s liability for failure to perform. Common examples include wars, labor strikes, natural disasters and other circumstances that are beyond the control of the parties or could not have been avoided through the exercise of due diligence.
The coronavirus pandemic may, depending on the wording in the contract, fit under a broad force majeure clause. Force majeure clauses frequently provide for disease or epidemics among the list of triggering events. Government stay-at-home orders and mandatory business closures may also qualify unless the parties addressed the risks of such events separately.
Prevailing on this issue in court would, of course, require analyzing the language of the clause at issue as well as establishing the necessary causal link between the pandemic and the particular failure to perform. For example, a disrupted supply chain due to travel restrictions could satisfy this requirement. An essential business that has been allowed to continue operating, and that is not dependent on foreign supply chains, may find it more challenging to demonstrate that their ability to perform was materially impacted.
Businesses should also be aware, in the event a dispute arises later on, that a party might be obligated to invoke the force majeure clause to mitigate their damages. The doctrine of “mitigation of damages” prevents a party from recovering damages for losses they could have avoided had they acted reasonably to avoid them. The general rule is that the injured party is only required to act “reasonably” in mitigating her damages—and in many cases whether some action qualifies as “reasonable” is a question of fact for the jury. For example, in TransAlta v. Sicklesteel Cranes, 134 Wn. App. 819, 826 (2006), the court held that whether the plaintiff acted reasonably by purchasing its power requirements on the open market to meet its contractual obligations to a third party rather than mitigating by invoking a force majeure clause in the parties’ contract was a question that could not be resolved as a matter of law and thus was reserved for a jury. Id. at 826. This case illustrates that there is no one-size-fits-all approach and that whether a party has a duty to mitigate by invoking a force majeure clause will largely depend on the facts of each particular transaction.
Washington businesses are facing extraordinary challenges. Businesses with contractual relationships or partnerships that have been impacted by the coronavirus, and/or by the government response to the outbreak, should review their agreements for potentially applicable force majeure provisions. Even in the absence of such a provision, common law principles may, under certain circumstances, excuse performance of contractual obligations. And, as always, feel free to contact Corr Cronin LLP attorneys Blake Marks-Dias and/or John Bender if you have questions.