Effects of Coronavirus on Commercial Contracts in California: “Act of God” Statutes and Force Majeur
The coronavirus has taken the world by storm, posing risks to human health, wreaking havoc on financial markets and global and local economies, and creating uncertainty as to the viability of commercial contracts.
While addressing health concerns remains the top priority, this writing concerns the impact of the coronavirus on commercial contracts in California. In particular, it details the state of the law in California and measures businesses can take to mitigate economic risk to the coronavirus and future unforeseeable calamites under the “superhuman” or so-called “act of God” doctrines and force majeure contract provisions.
I. Legal Standard in California
Contract performance may be statutorily excused by “superhuman” causes. Cal. Civ. Code § 1511(2); see also Cal. Civ. Code § 3526 (“No [person] is responsible for that which no [person] can control.”). So-called acts of God are within this rule of law, as acts of God are events that occur independently of human agency. Conlin v. Coyne (1937) 19 Cal.App.2d 78, 87; Ryan v. Rogers (1892) 96 Cal. 349, 353. Damage by the elements is equivalent to an act of God. Pope v. Farmers’ Union & Milling Co. (1900) 130 Cal. 139, 141.
Force majeure is a creation of contract, and excuses a party’s performance if an unforeseen event beyond its control prevents performance. Force majeure clauses apply more generally than acts of God where, under the circumstances, there was such an insuperable interference as could not have been prevented by the exercise of prudence, diligence, and care. Unlike superhuman causes, force majeure does not exclude the idea of human agency. Pacific Vegetable Oil Corp. v. C.S.T., Ltd. (1946) 29 Cal.2d 228, 238 (war as “force majeure”); Horsemen’s Benevolent & Protective Assn. v. Valley Racing Assn. (1992) 4 Cal.App.4th 1538, 1564. However, the rule that no one is responsible for damage caused by force majeure does not inure to the benefit of one who could have avoided the damage by complying with the contract. Holt Manufacturing Co. v. Thornton (1902) 136 Cal. 232, 235.
Extreme natural events do not equip companies with carte blanche to cancel contracts pursuant to “superhuman cause” statutes or force majeure contract provisions. Even major natural phenomena are not superhuman causes when they are reasonably foreseeable in the areas and at the times in which they strike. For example, an act of God may include floods, but not such high water as is reasonably to be anticipated at certain times of the year. Ryan v. Rogers (1892) 96 Cal. 349, 353. Likewise, a rainstorm which is merely of unusual intensity is not an act of God. That a rain established a record for volume in inches in each region does not make it unforeseeable, since rainfall is foreseeable in most places. Expected heavy rain at no point becomes an act of God due to its unusual volume. See Southern Pacific Co. v. City of Los Angeles (1936) 5 Cal.2d 545, 549. This does not mean, however, that an extraordinarily intense storm cannot provide a defense in a particular case. In one case, for example, an extraordinarily intense storm that produced an immense amount of rain that exceeded the design capacity of a storm drainage system was found to be a superseding cause of flooding to a plaintiff’s land, relieving the city from liability for inverse condemnation. See Byron v. City of Redding (2014) 225 Cal.App.4th 1264, 1279–1280.
II. The Coronavirus Constitutes a “Superhuman” Cause and may Trigger Force Majeure Contract Provisions
In December 2019, doctors identified a new coronavirus in Wuhan, China capable of spreading from person to person.
On January 30, 2020, the China Council for the Promotion of International Trade (“CCPIT”) announced that it would issue force majeure certificates to qualifying applicants. Legitimate documents, including proof of delays or cancellation of transportation, export contracts, and customs declarations were required to secure CCPIT force majeure certificates. These certificates indicate, but are not dispositive, of the occurrence of force majeure. The CCPIT explained that they “can help enterprises minimize liability for contracts that can’t be fulfilled due to the epidemic and safeguard their legitimate rights and interests.”
On January 30, 2020, the International Health Regulations Emergency Committee of the World Health Organization declared the outbreak a “public health emergency of international concern.”
On January 31, 2020, U.S. Health and Human Services Secretary Alex M. Azar II declared a public health emergency for the United States to aid the nation’s healthcare community in responding to the coronavirus.
During the week of February 23, 2020, the Centers for Disease Control and Prevention reported community spread of the coronavirus in California, Oregon and Washington. Community spread in Washington resulted in the first death in the United States from the coronavirus, as well as the first reported case of the coronavirus in a health care worker, and the first potential outbreak in a long-term care facility.
On March 4, 2020, California Governor Gavin Newsom declared a state of emergency after the state confirmed its first death due to coronavirus.
As of this writing on March 25, 2020, in California, everyone is required to stay home except to get food, care for a relative or friend, get necessary health care, or go to an essential job.
Whereas the coronavirus situation remains in flux, it is this jurist’s opinion that the coronavirus constitutes a “superhuman” cause pursuant to California Civil Code sections 1511(2) and 3526, and may trigger force majeure clauses in California contracts.
III. Practical Measures Businesses Can Take to Mitigate Commercial Risk in Spite of the Coronavirus
“Superhuman cause” statutes and force majeure contract provisions may excuse a party’s performance if an unforeseen event outside the party’s control prevents the party from performing its contractual obligations. To the extent the parties have expressly addressed unforeseen events by including a force majeure clause in the contract, standard rules of contract interpretation dictate that courts and arbitrators will look to the contract, not catchall statutes, to enforce allocation of risk as intended by the parties at the time the contract was entered.
In weighing whether to invoke a force majeure contract clause during the coronavirus crisis, companies should take the following proactive steps:
Establish that the coronavirus falls within the scope of the specific force majeure contract clause. Because force majeure clauses are a creation of contract, courts and arbitrators will typically only enforce a force majeure clause to the extent it specifically identifies the event that prevents performance.
Compile documentation to show the coronavirus was unforeseeable for the specific contract at issue. In other words, show the risk of the coronavirus could not have been allocated in the contract. For contracts entered into before February 1, 2020, there is a strong argument that the coronavirus and its impacts were not foreseeable.
Demonstrate that the company could and would have performed but for the coronavirus. A party isn’t excused from performance due to force majeure when it was otherwise unable to perform. To meet this requirement, show initial deposits were paid, past performance of the contract, etc.
Show that despite the coronavirus, the company’s failure to perform could not have been avoided or overcome through alternative means. Companies must consider mitigation measures and document the same. This will vary depending on the type of contract at issue, but could include new arrangements to perform electronically, e.g., by webinar.
Comply with any notice requirements in the contract.
IV. Risks of Invoking Force Majeure
By invoking force majeure, companies risk breach of contract and anticipatory breach of contract claims. Due to this risk, it is imperative that, before invoking force majeure, companies diligently take measures to address each of the bullet points above. For future contracts, update boilerplate force majeure clauses to account for new risks to contractual performance, including diseases, epidemics, pandemics, and quarantines.
V. Negotiate with Counterparts to Develop Creative Business Solutions
This writing is intended to help businesses identify the broad parameters of the law of force majeure in California, and to create a roadmap so leaders can take proactive steps to mitigate risk. While it is important to understand your legal rights and prepare for the worst, parties should enter negotiations with an eye towards collaboration and future business. Instead of taking a hard line, begin by inquiring about the health and safety of loved ones and, wherever possible, make reasonable concessions so that when the dust settles, you can focus on business, not lawsuits.
In good health,