With New Hampshire Governor Sununu’s Emergency Order #17 announcing closure of all “non-essential” businesses, many individuals and businesses confront contractual obligations they may not be able to fulfill. Some contracts attempt to address unforeseen circumstances with force majeure clauses, which is French for a “superior” or “irresistible” power. The term is used in the legal system to refer to natural or unavoidable catastrophes interfering with the normal course of business.
For a business to better understand its options requires an assessment of several considerations, such as contract language, governing laws, and key provisions like breach, termination, cancellation, or repudiation terms.
First, does the contract contain a force majeure clause? A force majeure, or “act of God,” clause essentially is an affirmative defense designed to protect and allocate risks between the contracting parties should an event occur which prevents performance due to unforeseeable and unavoidable natural causes. A force majeure example would be an act that “could not happen by the intervention of man, as storms, lightning, and tempests.” Rixford v. Smith, 52 N.H. 355, 357 (1872). The party asserting a force majeure clause to excuse nonperformance bears the burden of proof.
Provided the contract contains such a clause, consider the contract’s specific language. Does the contract list or define force majeure events? Some clauses explicitly list events constituting force majeure, while others may include vague or broad “catch-all” language. Some clauses are triggered only when performance becomes impossible, while more liberal clauses may only require performance delay or hindrance.
Typically, the more specific the clause, the more restricted and limited its application. Nonperformance of a contract due to acts of God may be excusable only if the contract terms “provided against contingencies and responsibilities,” and “inevitable accident or other casualty, although not foreseen nor within party’s control” are not excused.
More uncertainty exists with broad clauses containing catch-all phrases, such as “other circumstances beyond the reasonable control of the affected party.” Despite opinions circulating on the internet that nonperformance caused by COVID-19 should qualify under most force majeure clauses, it is unclear how New Hampshire courts would construe broad force majeure clauses to cover a party’s nonperformance due to COVID-19.
Absent a force majeure or Act of God clause, New Hampshire businesses might find another avenue in the doctrine of “frustration of purpose” or “commercial frustration.” The New Hampshire Supreme Court considered the concept in Perry v. Champlain Oil Co., Inc., 101 N.H. 97, 98 (1957). That case involved a fifteen (15) year lease agreement for a gasoline station where its formula-based ground rent was determined by the gas sold. When the tenant/operator changed from the well-known “Sunoco” brand to a lesser known brand (the immortal “Cities Service”) after only seven months, sales decreased, resulting in lower rent. The landlord challenged the lease agreement under the concept of commercial frustration.
Although the court dismissed the claim, it acknowledged the doctrine’s relevance. Frustration of purpose assumes the possibility of literal performance, but excuses performance because supervening events have essentially destroyed the purpose for which the contract was made.
The high court also noted that “generally speaking, the courts have been careful not to find commercial frustration if it would only result in allowing a party to withdraw from a poor bargain.” Id. at 99. Thus, claimants looking for relief using this avenue will face substantial scrutiny and a high bar.
Another theory is impossibility of performance. See RSA 382-A:2-615 (defining a seller’s excuse by failure of presupposed conditions under Article 2 of the Uniform Commercial Code). As with commercial frustration, impossibility of performance requires “extreme hardship in order to excuse the promisor.”
Similarly, businesses should determine if the contract contains a “material adverse change” (MAC) or “material adverse effect” clause. Under a MAC clause, performance may be excused when there has been a material change in the business, operations, or financial conditions of a company. Although these provisions are most common in financial or mergers and acquisition agreements, all contracts should be reviewed to determine if the existing agreement expressly includes a MAC clause.
Invoking a force majeure clause generally requires adherence with the other terms of the contract, such as prompt and adequate notice. A few relevant responsibilities to consider include the particular performance(s) excused, duty to mitigate damages, and contractual implications (e.g. excused or suspended performance, or potential to modify/renegotiate, termination). See e.g. RSA 382-A:2-615(b) (where only a portion of a seller’s capacity to perform has been affected, a seller will not be in breach of any one agreement if he allocates production and deliveries among customers fairly and reasonably).
As a final note, businesses should check to see if they have business interruption insurance coverage, sometimes called force majeure insurance. This coverage sometimes is bundled with commercial property insurance policies. See the New Hampshire Insurance Department’s informational FAQs about Business Interruption Insurance and COVID-19.
Paul J. Alfano