COVID-19 Enough to Trigger Force Majeure?
By Zita R. Brack
In response to the rapid spread of the infectious COVID-19 virus, most states have issued Stay-At-Home Orders for residents, the severity of the Stay-At-Home orders vary from state to state. Consequently, all non-essential businesses, such as, restaurants, bars, theatres, concert halls, studios, parks and museums have been mandated to close and significant travel restrictions have been put into place. What does this mean for Hollywood? Film release dates have been pushed back, television productions have been suspended, concerts and festivals have been rescheduled, sporting events are cancelled indefinitely, and the list continues. Consequently, these delays and restrictions have film studios, record companies and other entertainment companies looking to explore options to excuse their obligations under existing contracts.
Force majeure refers to a clause that is included in contracts to remove liability when a contracting party is relieved from performing when performance is made impossible by an unforeseeable event outside of such party’s control. As reflected in the California Civil Code, the principle is that “No man is responsible for that which no man can control.” Cal. Civ. Code § 3526. There are three basic categories of force majeure: acts of God (i.e. natural disasters: hurricanes, earthquakes, tornadoes, fires); human events (i.e. riots, wars and other serious upheavals); and performance failures outside of the contracting party’s control (i.e. labor-related disputes, unavailability of raw materials, restrictions imposed by the government). To trigger force majeure, the event must be both unavoidable and unforeseeable. Some jurisdictions also require the parties to explore alternate performance options.
Whether or not COVID-19 will qualify as an event to trigger force majeure depends on the jurisdiction, and the actual contract language. Some contracting parties may be able to invoke force majeure to excuse contractual non-performance if the government’s stay-at-home orders make the clauses at issue impossible to perform. From there, the party seeking to avail themselves of force majeure must also establish that along with impossibility of performance, there is the inability to mitigate.
In production agreements with production companies, many television and movie studios often include a catchall that states that force majeure is triggered due to “any other reason beyond the reasonable control of a party.” California courts have not ruled on the applicability of force majeure provisions with regard to a pandemic such as the coronavirus. Nonetheless, even if the clause does not specifically, refer to epidemics or infectious diseases as an event to trigger force majeure, given the extreme disruption COVID-19 has caused, the defaulting party will likely have a strong argument under such a catchall. As a result, under this theory, the production company may cancel shooting or delay shooting indefinitely without being in breach of the agreement, however, the studio would not be responsible for any extra costs incurred due to such delay or cancellation (e.g., talent fees, location fees, option fees, etc.).
Where the contract does not include a force majeure clause, the common law doctrines of impossibility and impracticably will govern. A party can seek protection under the impossibility or impracticability doctrine where performance physically becomes impossible perhaps due to death or incapacitation; the item crucial to performance becomes destroyed (through no fault of the defaulting party) and there is no reasonable substitution, or, if after the contract is signed a new law comes into being that makes such performance illegal. In California, courts find that performance must truly be impossible to perform. Mere difficulty or unusual unexpected expenses will not be enough on its own to excuse performance. In the case where events/ concerts/ activations have been postponed, but not cancelled, even if the companies may experience unexpected expenses, this will not be enough for non-performance, at least not in California. Further, a party may be excused from performance if they can show commercial impracticability. Commercial impracticability is a defense where the defaulting party can show that performance is so difficult or costly to perform that the value of the contract to one party is destroyed. This defense is typically used in connection with the sale of goods. This might offer relief for businesses in the fashion industry. For example, if they are required to fulfil an order, but now must obtain materials from a more expensive source, this might frustrate the value of the contract that was in place prior to the COVID-19 outbreak.
All in all, COVID-19 and governmental regulations must be monitored closely to determine the actual impact on contractual performance, determining if these factors, in fact, make performance of contractual obligations impossible while looking for possible ways of mitigation.