Can COVID-19 Excuse Contractual Performance?

Authors: Jeannette V. Filippone and Lauren J. Ash

Updated: 5/11/2020

As COVID-19 continues to cause to significant economic uncertainty and disruption to commercial operations, many businesses are finding that contractual performance has been substantially impacted or impaired by “stay at home” orders, supply chain issues, travel restrictions or other fallout from the public health emergency.  Businesses may be considering (1) how to respond to counterparties who have suspended, or threatened to suspend, performance of their contractual obligations or (2) whether their own failure to perform may be excused.  In order to assist in answering these questions, and to help businesses determine whether there may be any legal basis to excuse or suspend performance, we have provided a brief overview of California law governing when non-performance of contractual obligations may be excused under the contract defense of “force majeure”, as well as the related defenses of impossibility or commercial impracticability and frustration of purpose.    

1. The defense of force majeure under the California Civil Code

Generally speaking, the law holds parties to their contractual obligations. However, certain provisions of the California Civil Code and defenses available under California common law may excuse performance of a party’s obligations under certain circumstances. 

Under Section 1511 of the California Civil Code, performance is excused when it “is prevented or delayed by an irresistible, superhuman cause” (traditionally referred to as “force majeure”) unless “the parties have expressly agreed to the contrary”.[1]   California courts have interpreted “an irresistible, superhuman cause” to mean “natural causes” or “insuperable interference”, the effects of which could not be “prevented by the exercise of prudence, diligence, and care.”[2]  The courts will typically apply common law principals to determine whether to excuse performance of a contract, such that performance may be excused or delayed only when an (1) unforeseeable event, (2) outside of the parties’ control, (3) renders performance impossible or impractical (i.e. unreasonably difficult or expensive).[3] It is important to note that Section 1511 (and the force majeure defense more generally) is not intended to protect contracting parties from negative business outcomes or excuse a party from using reasonable measures to meet its contractual obligations.  In addition, the duty to perform typically resumes after the force majeure event ends.

Under California law, the parties to a contract can agree to allocate risks related to force majeure events, expressly identify which events will constitute force majeure events, and require written notice that such an event has occurred in order to excuse or delay performance.  As a result, many commercial contracts contain force majeure clauses that expressly identify the events that will excuse or delay performance by one or more parties to a contract, as well as the notice requirements related to such events.  In the absence of a force majeure clause, California courts will rely on the statute and case law to determine whether the provisions of Section 1511 will excuse performance under a contract.   

Whether COVID-19 and the related governmental orders impacting the operations of certain businesses will constitute “an irresistible, superhuman cause” will ultimately be decided by California courts following litigation.  However, it is likely that Section 1511 will excuse or permit delayed performance for some businesses.   

2. Force majeure contract clauses

In general, a force majeure clause is provision in a contract that allocates the risk of loss if one or more parties cannot perform their obligations under the contract as a result of a force majeure event. A force majeure clause may excuse performance, suspend performance, or apportion the costs of loss. The clause may apply to all contracting parties or it may be drafted to excuse performance by one party. 

In a contract governed by California law, a force majeure clause will generally identify the categories of events that will excuse performance, as opposed to relying on a court’s determination of what constitutes an “irresistible, superhuman cause.” The clause may include a list of specific triggering events (for example, terrorist acts, war, strike, fire, earthquake or flood).  The specific language in the contract will determine whether the event is considered a force majeure event under the contract, and if so, to what extent performance will be excused.  Some contracts may expressly include “epidemic” or “pandemic” in the list of force majeure events.  However, many will not.

California courts will generally read certain aspects of the California common law force majeure defense into contractual force majeure provisions.[4]  As a result, in contracts governed by California law, a force majeure contract provision will typically only excuse performance if the event claimed to be a ‘force majeure’ is: (1) beyond the control of impacted party[5]; (2) unforeseeable at the time of contracting (unless specifically identified as force majeure event in the contract)[6]; and (3) the proximate cause of nonperformance.[7] In addition, the party seeking to excuse performance must demonstrate that performance of its contractual obligations will result in extreme and unreasonable difficulty, expense, injury, or loss.[8] 

If you have a force majeure provision in your contract:

  • Review the language of the contract carefully to determine whether the pandemic or a related event is covered as a force majeure event.  Note that although “pandemic” may not be referred to explicitly, the contract clause may refer to changes in government orders or laws, actions by a governmental authority, or national or regional emergency.  If the contract cannot be performed as a result of a governmental order arising as a result of COVID-19, performance may still be excused under one of these provisions.
  • Take note of the date of the contract and consider whether the pandemic or related governmental action or other event was foreseeable at the time the contract was entered into.
  • Consider how, and to what extent, the pandemic and related events has impacted performance under the contract. 
  • Determine whether the contract provides for any notice requirements or a duty to mitigate that must be complied with for performance to be excused.
  • Consider the effect of invoking force majeure.  Does the provision excuse or suspend performance?  Does invoking the provision give the other party the right to terminate the agreement? 

3. Other defenses to contractual performance

In the absence of a force majeure provision in the contract (or where the force majeure provision may not apply to the particular circumstances of COVID-19), a party may be excused from performance of its contractual obligations if it can demonstrate that an intervening and unforeseeable event has made performance impossible or impracticable, or if the purpose of the contract has been frustrated.  The application or availability of these defenses varies depending on the particular jurisdiction, so it is important to take note of the governing law section of the applicable contract.

Section 1441 of the California Civil Code provides that the performance of contractual obligations is excused when performance is objectively impossible or unlawful[9] (this is often referred to as “commercial impracticability” or “impossibility”).  Under Section 1597 of the California Civil Code, “[e]verything is deemed possible except that which is impossible in the nature of things.”  Under California common law related to “impossibility” or “commercial impracticability”, performance of a contract may be excused when an (1) unforeseeable event, (2) outside of the parties’ control, (3) renders performance impossible or impractical (i.e. unreasonably difficult or expensive)[10].

Unlike force majeure clauses and the defense of impossibility, the common law doctrine of frustration of purpose may be available to excuse performance where parties are still able to perform, but where the main purpose of the contract has been frustrated such that performance is valueless.  In order to excuse performance, the nonperforming party must show that: (1) the risk of the frustrating event was not reasonably foreseeable; and (2) the value of performance is totally or nearly totally destroyed.

As with the analysis above regarding force majeure provisions, in order to determine whether any defenses may apply to excuse performance, you should:

  • Review the terms of the contract carefully to determine whether any contract terms relate to the availability of these contract defenses.
  • Take note of the date of the contract and consider whether the pandemic or related governmental action or other event was foreseeable at the time the contract was entered into.
  • Consider how, and to what extent, the pandemic and related events has impacted performance under the contract.  Is performance impossible or unreasonably difficult or expensive, or has the primary purpose of the contract been destroyed?
  • Determine whether the contract provides for any notice requirements or a duty to mitigate.

[1] Cal. Civ. Code § 1511.

[2] Fay v. Pac. Imp. Co., 93 Cal. 253, 28 P. 943 (1892); Pacific Vegetable Oil Corp. v. C.S.T., Ltd., 29 Cal. 2d 228 (1946)

[3] Lloyd v. Murphy 25 Cal. 2d 48 (1944); Citizens of Humanity, LLC v. Caitac Int’l, Inc., No. B215233, 2010 WL 3007771 (Cal. Ct. App. Aug. 2, 2010)

[4] Watson Labs., Inc. v. Rhone-Poulenc Rorer, Inc., (2001) 178 F. Supp. 2d 1099

[5] Id.

[6] Id. at 1113-1114

[7] See Hong Kong Islands Line Am. S.A. v. Distribution Servs. Ltd., 795 F. Supp. 983, 989 (C.D. Cal. 1991), aff’d, 963 F.2d 378 (9th Cir. 1992)

[8] San Mateo Cmty. College Dist., 65 Cal. App. 4th 401

[9] Cal. Civ. Code § 1441.

[10] Lloyd v. Murphy (1944) 25 Cal. 2d 48; Citizens of Humanity, LLC v. Caitac Int’l, Inc., No. B215233, 2010 WL 3007771 (Cal. Ct. App. Aug. 2, 2010)