Policy and Contract Working in Tandem: Force Majeure Clauses and COVID-19

by Colleen Brugger, Associate Member, University of Cincinnati Law Review Vol. 91

I. Introduction

COVID-19’s (“COVID”) onset in the United States was sudden and rapid, with New York State on the initial frontlines of the pandemic.¹ In response, New York’s Governor Cuomo signed a flurry of executive orders.² The state and federal courts of New York then pioneered litigation solutions, including the prominent use of force majeure clauses in the commercial context.³ Force majeure clauses, generally, are bargained for clauses to excuse the performance of one party in the face of a wholly unanticipated event.⁴ However, the effective implementation of force majeure clauses leaned on the early and broad COVID-related orders from the executive branch.

This article explores the power of force majeure clauses working in conjunction with unprecedented circumstances and state policy. Section II provides background on what exactly a force majeure clause is, the background executive policy, and how parties used the clause during COVID-related litigation. Section III discusses why the policies enabled these litigation outcomes. Finally, Section IV concludes by providing a summary of force majeure clauses’ use during COVID.

II. Background

As a consequence of stay-at-home orders,⁵ commercial disputes quickly arose.⁶ Whether for the sale of an art piece, reservation of a wedding venue, or rent for retail or gym space, many of these disputes were a direct result of governmental lockdowns and closures.⁷ All of these disputes relied on the emergent backdrop painted by the circumstances surrounding COVID, New York State executive orders,⁸ and force majeure clauses.

A. The Circumstances and New York State Executive Orders

The onset of COVID was plagued with continuous change and uncertainty.⁹ Resultingly, COVID policies–such as the executive orders–were irrevocably intertwined with the specific facts of the ongoing circumstances.¹⁰ New York declared its state of emergency on March 7, 2020, through Executive Order 202.¹¹ Executive Order 202 contemplated the state of emergency ending early September.¹² At that time there were only eighty-nine confirmed COVID cases and zero deaths in the entire state.¹³ The cases were concentrated in New York City–only about twenty cases came from outside that area.¹⁴ The express purpose of the state of the emergency was to clear the path for concise COVID policies.¹⁵

In the days immediately following New York’s announcement of the state of emergency–schools closed and shifted to online instruction.¹⁶ However, New York policies gradually approached the absolute nature of closure.¹⁷ On March 18, 2020, there were 2,480 cases in New York–more than a 200% increase from March 7 when the state of emergency began. Also on March 18, New York issued an executive order requiring employers to reduce office capacity by 50% over the next two days.¹⁸

From here the circumstances changed quickly, with each subsequent executive order modifying the capacity of employers for in-person employment.¹⁹ The next day, March 19, the capacity for in-person employment was decreased to 25% unless the business was categorized as essential.²⁰ On March 20, New York issued a stay-at-home order.²¹ Effective March 22, all non-essential businesses in New York State were effectively closed.²² This stay-at-home order prompted the use of force majeure clauses as the number of COVID cases continued to rise.²³

B. What are Force Majeure Clauses?

Force majeure clauses are bargained-for provisions in a contract, which relieve one party from performing when circumstances occur that neither party could anticipate nor control.²⁴ Force majeure clauses act as a codification of common-law doctrines which enable a party to be excused from performance: impossibility, impracticability, and frustration of purpose.²⁵ The rise of force majeure clauses benefits contractual parties, as courts usually only enforce the common-law doctrines in truly extraordinary circumstances.²⁶

Today, there are four components to an enforceable force majeure clause.²⁷ These components include: (1) definitions of the breach to which the clause is applicable, (2) the triggering event, (3) the causal connection between the breach and triggering event, and (4) the consequences of an excused performance.²⁸ One important consequence of a force majeure clause is that it may not obligate recission–or returning parties to their pre-contract state–unless expressly stated in the clause itself.²⁹

C. New York Courts Response–Force Majeure Claims

Courts, since the pandemic, have been receptive to force majeure arguments.³⁰ Each of the cases described below takes a different approach to implementing the force majeure clause at issue. However, each case relies heavily upon the uniqueness of COVID and New York’s executive orders.

1. JN Contemporary Art LLC v. Phillips Auctioneers

COVID, and surrounding policy, are inherent to the enforcement of a force majeure clause.³¹ In JN Contemporary Art LLC, an art dealer contracted auctioneers to offer up a painting at a well-known spring auction in exchange for a minimum bid.³² However, due to COVID, the auction was first postponed and later held in a virtual format.³³ The agreement was terminated by the auctioneers before the auction was held virtually.³⁴ The force majeure clause in that agreement stated:

[I]n the event that the auction is postponed for circumstances beyond our or your reasonable control, including, without limitation, as a result of natural disaster, fire, flood, general strike, war, armed conflict, terrorist attack or nuclear or chemical contamination, we may terminate this Agreement with immediate effect. In such event, our obligation to make payment of the Guaranteed Minimum shall be null and void and we shall have no other liability to you.³⁵

In discussing the clause’s effect, the Court placed heavy emphasis on the italicized language above.³⁶ The agreement did not obligate the auctioneers to create a new performance to adapt to current circumstances and policy–as the art dealer desired.³⁷ The agreement merely required the existence of a force majeure triggering event.³⁸ In JN Contemporary Art LLC, the triggering event considered by the court was the “COVID-19 pandemic and the orders issued by New York’s governor that restricted how nonessential businesses could conduct their affairs during the pandemic.”³⁹ This synonymous view of policy and circumstances as an event cemented the role of policy in force majeure considerations.

2. Nelkin v. Wedding Barn

Policy can be the determining factor in the enforcement of a force majeure clause.⁴⁰ In Nelkin, a couple had contracted for a wedding venue years before COVID.⁴¹ At the outset of COIVD, when the couple decided to cancel their venue, the venue refused to refund any of the payment received.⁴² The venue charged a flat rate, regardless of the number of guests.⁴³ However, at the time of the litigation the venue could only perform a fifty person wedding on the couples selected date–one-third of the initial promised performance.⁴⁴ The court, skating over the existence of COVID, focused instead on the executive orders stemming from it.⁴⁵ In the court’s view, the executive orders created policy which changed the practicality of the venue’s promised performance–placing the performance within the scope of governmental regulations.⁴⁶ This perspective allowed the court to place the performance within the force majeure clause–which expressly considered governmental regulations.⁴⁷ Without the orders, the court would have been unlikely to disturb a freely negotiated contract.

III. Discussion

The use of force majeure clauses exploded in the wake of COVID. However, without the backdrop created by executive orders, courts would be unlikely to use force majeure clauses to excuse performance between contracting parties.

Facially, force majeure clauses contemplate something intangible–a triggering event that the contracting parties cannot foresee.⁴⁸ For better enforcement of the clause, the impact or event must be tangible to some degree. Often, contractual parties do this by including an illustrative list of triggering events in their force majeure clauses–like the one above in JN Contemporary Arts.⁴⁹ Courts stopped short of categorizing COVID, itself, within those lists.⁵⁰ Therefore, COVID, standing alone has not been considered tangible enough to provoke judicial relief.⁵¹ Instead, the courts focused on the impact, and specifically, the governmental response to COVID, when analyzing force majeure clauses.⁵²

The governmental response to COVID was delayed, repetitive, and reactive. Over the course of three days, the State of New York went from working in-person at full capacity to the request for 50% in-person capacity, to 25% in-person capacity, to 100% of nonessential business being conducted at home.⁵³ This drastic government-mandated shift in most peoples’ daily lives did not go unnoticed by the courts. In both Nelkin and JN Contemporary Arts there is no mention of COVID without some reference to New York executive orders.⁵⁴

The governmental orders made COVID tangible for judicial intervention. In fact, the court in Nelkin viewed the governmental orders as inherently modifying the parties’ private agreement.⁵⁵ This modification created a concrete impact–limiting the number of guests at a wedding.⁵⁶ Without this modification there was only a tenuous link between COVID and the number of guests at the wedding.⁵⁷ The same applies in JN Contemporary Art.⁵⁸ There, the auction where the dealers painting was supposed to be sold, was delayed prior to the stay-at-home orders.⁵⁹ However, the stay-at-home orders were in effect on the intended date of the auction.⁶⁰ The existence of the orders created and conceptualized concrete harm which courts are comfortable remedying no matter the framework. Therefore, the executive orders, as the embodiment of COVID policy, ensured the enforcement of the force majeure clauses in unprecedented circumstances.

IV. Conclusion

Force majeure clauses sit and wait in commercial contracts for the unthinkable to occur. The unthinkable occurred with the onset of COVID. When New York began issuing executive orders in mid-March 2020, there were only eighty-nine reported COVID cases.⁶¹ By the end of the month, there were 83,712 cases and an executive order keeping people home.⁶² The executive orders issued in New York framed the harm incurred by the parties who were unable to perform. Without the executive orders providing the basis for judicial relief, the parties would have appeared to be making arbitrary decisions–which would not fall under the scope of force majeure clauses. Based on this framing, the courts were able to provide relief in unprecedented times.

Cover Photo by Robert on Flickr and licensed under CC BY-NC-ND 2.0.

Colleen Brugger

Colleen Brugger is a Cincinnati native who is looking forward to exploring the various law topics this year. When she is not working towards her law degree, Colleen enjoys exploring the city and a good book.

References

1
See Eyewitness News, Coronavirus Pandemic in New York State – Coverage from March 2020, ABC 7 N.Y. (Apr. 1, 2020), https://abc7ny.com/coronavirus-new-york-march-2020-ny-cases-in-news/6099864/.
2
See Exec. Order Nos. 202, 202.6-202.8, N.Y. Comp. Codes R. & Regs. tit. 9, §§ 8.202, 8.202.6-8.202.8 (2023).
3
Paula M. Bagger, The Importance of Force Majeure Clauses in the COVID-19 Era, Am. Bar Ass’n (Mar. 25, 2021), https://www.americanbar.org/groups/litigation/committees/commercial-business/boilerplate-contracts/force-majeure-clauses-contracts-covid-19/.
4
Id.
5
Exec. Order No. 202.8, N.Y. Comp. Codes R. & Regs. tit. 9, § 8.202.8 (2023).
6
See JN Contemp. Art LLC v. Phillips Auctioneers LLC, 29 F.4th 118, 123-24 (2d Cir. 2022).
7
See id.; Nelkin v. Wedding Barn at Lakota’s Farm, LLC, 72 Misc. 3d 1086 (N.Y. Civ. Ct. 2020); NTS W. USA Corp. v. 605 Fifth Prop. Owner, LLC (In re NTS W. USA Corp.), No. 20-CV-6692 (CS), 2021 U.S. Dist. LEXIS 171240 (S.D.N.Y. Sept. 9, 2021); Delshah 60 Ninth, LLC v. Free People of Pa., LLC, No. 20 Civ. 5905 (JMF) (SLC), 2022 U.S. Dist. LEXIS 116284 (S.D.N.Y. June 29, 2022); Gap Inc. v. Ponte Gadea N.Y. LLC, 524 F. Supp. 3d 224 (S.D.N.Y. 2021).
8
Exec. Order Nos. 202, 202.6-202.8, N.Y. Comp. Codes R. & Regs. tit. 9, §§ 8.202, 8.202.6-8.202.8 (2023).
9
See generally Eyewitness News, supra note 1.
10
Exec. Order No. 202.1, N.Y. Comp. Codes R. & Regs. tit. 9, § 8.202.1 (2023).
11
Exec. Order No. 202, N.Y. Comp. Codes R. & Regs. tit. 9, § 8.202 (2023).
12
Id.
13
Eyewitness News, supra note 1.
14
Id.
15
Id.
16
Id.
17
See Exec. Order Nos. 202.6-202.8, N.Y. Comp. Codes R. & Regs. tit. 9, §§ 8.202.6-8.202.8 (2023).
18
Exec. Order No. 202.6, N.Y. Comp. Codes R. & Regs. tit. 9, § 8.202.6 (2023).
19
Exec. Order Nos. 202.7-202.8, N.Y. Comp. Codes R. & Regs. tit. 9, §§ 8.202.7-8.202.8 (2023).
20
Exec. Order No. 202.7, N.Y. Comp. Codes R. & Regs. tit. 9, § 8.202.7 (2023).
21
Exec. Order No. 202.8, N.Y. Comp. Codes R. & Regs. tit. 9, § 8.202.8 (2023). This executive order in New York was referred to as the Pause Order. As similar orders became more common across the United States, the orders were colloquially referred to as stay-at-home orders. This article uses stay-at-home to refer to the Pause Order.
22
Id.
23
Eyewitness News, supra note 1.
24
Bagger, supra note 3.
25
Matthew S.C. Moore & Cornelius F. “Lee” Banta, Jr., The Force Majeure Doctrine and Standard Construction Form Contract Provisions: Revisiting an Old Contract Provision During These New Uncertain Times, 17 Constr. L.J. 28 (2021); George Wallach, Excuse Defense in the Law of Contracts: Judicial Frustration of the U.C.C. Attempt to Liberalize the Law of Commercial Impracticability, 55 Notre Dame L. Rev. 203, 204 (1979).
26
See Wallach, supra note 25, at 207.
27
Bagger, supra note 3.
28
Id.
29
Id.
30
See JN Contemp. Art LLC v. Phillips Auctioneers LLC, 29 F.4th 118, 123-24 (2d Cir. 2022); Nelkin v. Wedding Barn at Lakota’s Farm, LLC, 72 Misc. 3d 1086 (N.Y. Civ. Ct. 2020).
31
JN Contemp. Art LLC, 29 F.4th at 124-25.
32
Id. at 121.
33
Id. at 122-23.
34
Id. at 122.
35
Id. at 121 (emphasis added).
36
Id.
37
Id. at 123.
38
Id.
39
Id. at 123-24.
40
Nelkin v. Wedding Barn at Lakota’s Farm, LLC, 72 Misc. 3d 1086, 1095 (N.Y. Civ. Ct. 2020).
41
Id. at 1087.
42
Id. at 1087-88.
43
Id. at 1091.
44
Id. at 1088.
45
Id. at 1093-93.
46
Id. at 1095.
47
Id. at 1091 (“The performance of this Agreement is subject to termination without liability and refund of all refundable deposits upon the occurrence of any circumstances beyond the control of either party — such as acts of God, war, acts of terrorism, government regulations (including zoning ordinance), disaster, strikes (except those involving employees or agents of the party seeking the protection of this clause), civil disorder, or curtailment of transportation facilities . . . .”).
48
Bagger, supra note 3.
49
JN Contemp. Art LLC v. Phillips Auctioneers LLC, 29 F.4th 118, 121 (2d Cir. 2022).
50
Id. at 121.
51
Id. at 123.
52
Nelkin, 72 Misc. 3d at 1093-93; JN Contemp. Art LLC, 29 F.4th at 124-25.
53
Exec. Order Nos. 202.6-202.8, N.Y. Comp. Codes R. & Regs. tit. 9, §§ 8.202.6-8.202.8 (2023).
54
Nelkin, 72 Misc. 3d at 1093-93; JN Contemp. Art LLC, 29 F.4th at 124-25.
55
Nelkin, 72 Misc. 3d at 1095.
56
Id. at 1088.
57
See id.
58
JN Contemp. Art LLC, 29 F.4th at 124-25.
59
Id. at 122-23.
60
Id.
61
Eyewitness News, supra note 1.
62
Id.