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Commentary: Force majeure, Part II

Given the common law or statutory doctrines of commercial impracticability and frustration, parties typically address the risk of supervening events by including a force majeure or other “escape clause” in their contract. Because these clauses are enforceable under Missouri law, the place to start is the contract itself.

John Petite

John Petite

Although Missouri cases say little about the rules of construction for force majeure clauses, courts in other jurisdictions interpret them narrowly. For example, the 6th Circuit in In re Millers Cove Energy Co. held that, “ordinarily, only where a force majeure clause specifically includes the event alleged to have prevented performance, will a party be excused from performance.” Because force majeure is an affirmative defense, the burden of demonstrating that the force majeure clause covers the event at issue is on the party seeking to avoid performing.

Most important, Missouri law provides, as held in the 2009 Clean the Unif. Co. v. Magic Touch Cleaning Inc. decision, that a foreseeable “contingency not resulting in impossibility” excuses performance only when “the party wishing to be excused . . . provide[d] for that contingency in the contract.” The judicial rationale for the foreseeability test is, as professor Jennifer Camero noted in her University of New Hampshire Law Review article  “Mission Impracticable: The Impossibility of Commercial Impracticability,” “that a party would, or should, protect itself from a foreseeable event by adjusting the contract price or obtaining insurance to cover the risk of the event’s occurrence.” The corrolary to this principle is that, as courts hold in other jurisdictions, a party may not rely on common law doctrines of commercial impracticability or frustration to excuse performance for a foreseeable risk not addressed by a contract’s force majeure clause. As held in 1991 by a federal court of appeals in Perlman v. Pioneer Ltd. P’ship., when a “force majeure clause . . . is unambiguous and its terms were specifically bargained for by both parties,” the common law “doctrine of force majeure” should not supersede the contract’s terms and contract avoidance is solely an issue “of contract interpretation.”

Missouri courts have not clearly said how foreseeability is assessed. In the 1977 Missouri state court decision Howard v. Nicholson, however, the court tacitly endorsed an objective standard by citing a 1945 Kansas state court case, Berline v. Waldschmidt, where the court rejected an impossibility defense based on wartime regulations because the defendant “should have known” that World War II and regulations arising from it were possible from news reports and “the pages of history.” Given the history of epidemics and quarantines, it will be difficult to show that an epidemic shutdown could not be foreseen and accounted for in a contract’s force majeure provision.

In fact, as evidenced by many reported decisions quoting them, contracts commonly include an “epidemic” or “quarantine” as a force majeure event. As just one example, the U.S. Supreme Court, in United States v. Brooks-Callaway Co., quoted a form government contract excusing performance for “epidemics” and “quarantine restrictions.” Because such provisions are common, courts are unlikely to excuse performance for COVID-19 impediments unless the contract explicitly identifies epidemics or quarantines as force majeure events.

Cases in other jurisdictions dealing with earlier flu epidemics hold that shutdowns are foreseeable and thus must be addressed in the contract. In 1921, an Illinois appellate court in Phelps v. Sch. Dist. rejected a school’s “act of God” defense to a teacher’s breach of contract claim and held that the school was not excused from paying the teacher when the school had been closed because of a flu epidemic on the order of the State Board of Health. The court reasoned that the school closing “was not an ‘act of God’ and if [the] school district desired to protect itself from liability in cases of this character, it should have done so in its contract of hiring.” The court noted that its holding aligned with decisions in other states in the late 19th and earlier 20th centuries. This precedent makes it difficult for a party to avoid its contractual obligations because of the COVID-19 shutdown unless the contract says it can.

“Acts of law” that prevent or interfere with performance are typically identified as force majeure events. Section 264 of the Restatement, titled “Prevention By Governmental Regulation Or Order,” provides: “If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made.” This ground for excusing performance is limited in Missouri to instances when performance is made unlawful. In Rohr v. Reliance Bank, a federal district court applying Missouri law held that “when a contractual duty cannot be performed without violating the law, the duty of performance is discharged.” If performing under a contract would be illegal under the shutdown or quarantine laws, performance may be excused. Similarly, in Cape-France Enters. v. In re Estate of Peed, the Montana Supreme Court relied on the “injury” prong of Section 261’s definition of impracticability to excuse performance when requiring the obligor to perform would expose “the public . . . to potential health risks.”

As recently recognized by the 8th U.S. Circuit Court of Appeals in Boswell v. Panera Bread Co., recessions are a known and foreseeable risk for all commercial endeavors, such that parties are obligated to contractually identify them as a ground to excuse performance. Both section 2-615 of the Uniform Commercial Code and Section 261 of the Restatement contain comments that expressly prohibit a commercial impracticability defense for adverse market conditions or loss of profitability unless the contract expressly includes an economic downturn as a force majeure event. Not surprisingly, then, many courts across the country rejected the notion that 2008’s dire economic straits excused performance. But, unlike in 2020, governments responding to the 2008 financial crisis did not shut down non-essential businesses, such that businesses could not claim that their performance was prevented by law. In this way, the COVID-19 shutdown could lead to different judicial outcomes in certain limited circumstances.

Even if the contract captures the COVID-19 epidemic as a force majeure event, it will not excuse performance unless it actually or proximately causes the inability to perform. In Corrington v. Kalicak, a 1959 Missouri appellate court decision, the court endorsed what appears to be a strict causation principle requiring that the performance impediment be solely attributable to an event outside the contracting party’s control. The court held that, “when the result in part in ascribable to the participation of man, through active intervention the whole occurrence is thereby humanized, as it were, and removed from the operation of the rules applicable to the acts of God.”

Ultimately, if the contract addresses force majeure, that clause’s scope will almost invariably be dispositive regardless of common law principles. Because force majeure clauses often specifically include epidemics or quarantines as foreseeable contingences that can excuse performance, the absence of such a contractual provision will likely prevent a party from relying on a foreseeable pandemic to avoid its contractual obligations. The same holds true for government acts or laws that do not make performance unlawful or financial hardship from the shutdown-related recession. Consequently, a party seeking to avoid contractual performance under these legal defenses has a long and rocky row to hoe.

John Petite is an officer in the litigation practice group at Greensfelder, Hemker & Gale.

RELATED: Commentary: Force Majeure, Part I

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