COVID-19 and Force Majeure: 4th Quarter or Overtime?

As the NCAA and the NFL try to navigate their 2020 seasons amid frequent game postponements and live fan attendance, perhaps an analogy works to ask where things stand concerning force majeure clauses in commercial agreements and the various health-based restrictions that have made performance of many contracts impracticable, if not impossible.

Most business contracts contain a force majeure provision, which excuses performance of a contract due to unforeseen circumstances: floods, wars, civil unrest, government restrictions and, yes, sometimes even pandemics. Back in March and April, as we dusted off these provisions, we often found that the rapidly-spreading COVID crisis was likely covered by a specific term like “pandemic” or, more generally, by force majeure events like “government regulation” or “travel restrictions”—all of which were likely to apply to the closures and restrictions being implemented around the country and across the world. Even if contracts didn’t contain force majeure provisions, the parties’ performance obligations could in many cases be excused by the various lockdowns and business closures that were being ordered by health boards, governors and local executive authorities under traditional common law doctrines like “impracticability of performance” or “frustration of purpose.”

But as we move well into month nine of these restrictions, and beyond, how well do these force majeure provisions and common law doctrines stand up against the slew of executive orders still in place, expiring without renewal, or now even being re-implemented as COVID “positivity rates” are jumping across the national grid-iron? Is it the Fourth Quarter, the final weeks for most of the restrictions? Or are agreements around the world going to continue to be subject to overtime, or worse, a series of open-ended postponements before the agreements can be completed?

The answer may lie in the courts. There have been several constitutional challenges to executive orders around the country on the grounds that they violate individual (or corporate) due process, equal protection and first amendment protections, not to mention the often-overlooked freedom of contract. One lawsuit in Georgia federal court has raised all of these claims in a suit challenging the legal basis for the order issued by the Center for Disease Control on Sept. 4, 2020, which imposed an eviction moratorium on landlords and hospitality providers around the country (the CDC Order). Of course, the CDC Order came on top of, or in spite of, similar orders issued by states and municipalities. Well more than half the states have issued gubernatorial or other executive orders blocking tenant evictions for nonpayment as a result of the COVID crisis, with many similar orders being issued at the county, city or town level.

In addition to the Georgia lawsuit, which has been joined by several landlord associations, there also have been challenges brought against executive orders in Maine, Pennsylvania, Michigan and New York, all of which contest whether state action geared toward shutting down vast sections of the economy was justified under emergency powers created by statute but limited by state and federal constitutional protections. In May, the United States District Court for the District of Maine dismissed constitutional challenges based on the substantive due process “right to travel” because it found that the plaintiffs had not met their burden of showing that the travel and quarantine restrictions then imposed on out-of-staters were disproportionate to the health emergency that warranted imposition of those restrictions in the early weeks of the pandemic. The court noted that “at this early stage … [i]t is not at all clear that there are any less restrictive means for the state to still meet their goal of curbing COVID-19, and Plaintiffs’ proposed alternatives are at least arguably unworkable.” Bayley’s Campground, 2020 WL 2791797, *11 (D. Me. May 29, 2020). Does that still hold true?

In September, County of Butler v. Wolff, No. 2:20-cv-677, the U.S. District Court for the Western District of Pennsylvania struck down Pennsylvania’s emergency restrictions on the grounds that they violated the due process protections of the Fourteenth Amendment. In sum, the court found that state executive-order limits on the size and nature of gatherings, as well as stay-at-home orders, failed an “intermediate scrutiny” standard because “they are not narrowly tailored” to achieve the well-intentioned purpose of limiting the spread of the COVID illness. As such, they were not permissible “time, place and manner” restrictions and violated the due process clause of the 14th Amendment.

Also, on October 2, the Michigan Supreme Court invalidated a slew of of executive orders “limiting public and private gatherings, closing and imposing restrictions on certain businesses, and regulating a broad variety of other aspects of the day-to-day lives of our state’s citizens in an effort to contain the spread of this contagious and sometimes deadly disease.” In Midwest Inst. Of Health, PLLC, et al. v. Michigan, No. 161492, the Michigan Supreme Court held that Governor Whitmer’s executive orders violated one emergency statute and were invalid under a different emergency statute that the court determined to constitute an unconstitutional delegation of legislative authority.

Also, in October, Florida’s restrictions on tenant evictions were allowed to expire after Governor DeSantis had previously extended them a number of times. However, the CDC’s Order preventing evictions continues in force nationwide until Dec. 31, 2020, unless extended. As noted above, the CDC Order has been challenged in a Georgia federal court by a variety of plaintiffs’ groups, including landlords, who argue that the CDC Order is an unconstitutional an unlawful assertion of executive authority. Stay tuned on how that litigation proceeds. And just within the last couple of weeks, the U.S. Supreme Court, in a 5-4 decision, struck down a New York restriction limiting the number of persons that could attend religious services as violative of First Amendment considerations in the Constitution.

So, have circumstances now changed as the restrictions imposed by the CDC and the various state and local governments have come under increased constitutional scrutiny, even as the entire country experiences a resurgence of positive COVID test results and states and localities grapple with imposing new and tighter restrictions on an increasingly skeptical public? For now, as COVID cases spike and we all nervously await the arrival of much hoped-for vaccines, it seems that any restrictions that remain in place may continue to excuse performance of existing contracts, or lease agreements, but as the restrictions lift, or are successfully challenged in court, excuses for non-performance may no longer be available. It is certainly time to review any agreements to see where the fault lines of continued nonperformance may be. The longer these restrictions remain in place—without a clear consensus as to the tangible public health benefits that warranted such draconian measures—the more likely courts will follow the Western District of Pennsylvania, or perhaps even the U.S. Supreme Court, and declare those measures excessive, invalid and unenforceable. To the extent that happens, from a force majeure perspective, it could be “game over.”

Edmund M. O’Toole is a partner in Venable’s commercial litigation practice in the New York office.