The Effect of a Government-Ordered Shutdown on Contractual Performance
The recent Executive Orders of Governor Lamont, which have cascaded from shutting down gyms, fitness centers, movie theaters and restaurants, other than for take-out orders, followed by hair salons and the like, and culminating with all businesses deemed “non-essential,” obviously will have a devastating financial impact on these businesses.
As the revenue of any business subject to a government shut-down order inevitably declines or becomes non-existent, its contractual obligations remain the same. Or do they? Two possible legal avenues of relief are found in what are called “force majeure” clauses and the legal doctrine of impracticability of performance.
The classic legal definition of “force majeure” is “an event or effect that can be neither anticipated nor controlled; esp., an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to do. The term includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars).” Black’s Law Dictionary (11th ed. 2019).
A “force majeure clause” in a contract is one which “allocat[es] the risk of loss if performance becomes impossible or impracticable.” Id. The general purpose of a force majeure clause is “to relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated.” Phillips Puerto Rico Core, Inc. v. Tradax Petroleum Ltd., 782 F.2d 314, 319 (2d Cir. 1985). It would not be unusual to find such a clause in a commercial lease or construction contract and for it to include, as an excuse for nonperformance, government action which makes it impossible for a party to perform its contractual duties.
A force majeure clause will be interpreted by courts according to its terms, so that, for example, an event may not have to be unanticipated or unexpected if the language of the clause does not include such a requirement. See e.g. Perlman v. Pioneer Limited Partnership, 918 F.2d 1244, 1248 (5th Cir. 1990). Some courts have said that “[o]rdinarily, only if the force majeure clause specifically includes an event that actually prevents a party’s performance will that party be excused.” Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 902-03 (N.Y. Ct. of Appeals 1987). However, it has been held by at least one Connecticut court that a clause releasing a party from its contractual duties for an occurrence that was “beyond [its] control” was broad enough to encompass the government closure of an event facility that was licensed by that party to another for a major trade show. International Automotive Showcase, Inc. v. SMG, 2004 WL 1833312, at *2 (Conn. Super. Ct. judicial district of New Haven July 21, 2004).
In the absence of a force majeure clause in a contract or lease, the doctrine of impracticability of performance may apply to relieve a party that has been subject to a government shutdown from its contractual obligations. This doctrine has been recognized by Connecticut courts, see e.g. Dills v. Town of Enfield, 210 Conn. 705, 717 (1989), and is expounded on at great length in the Restatement (Second) of Contracts.
The general rule of “discharge by supervening impracticability” is stated in §261 of the Restatement (Second) of Contracts and provides that:
"[w]here, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate to the contrary.”
Id. The Restatement specifically provides that if a party’s performance of a contract “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.” Restatement (Second) Contracts §264. It explains that “[t]he regulation or order must directly affect a party’s performance in such a way that it is impracticable for him both to comply with the regulation or order and to perform.” Restatement (Second) Contracts §264, Comment b.
A governmental order requiring business closures or limiting business operations due to a pandemic could certainly be advanced as “an event the non-occurrence of which was a basis assumption on which [a] contract was made” and therefore, could be a basis for successfully asserting the impracticability defense.
Irve J. Goldman is a member of the Bankruptcy and Creditors Rights practice at Pullman & Comley, LLC, and has been certified as a business bankruptcy specialist by the American Board of Certification since 1993. He can be reached at email@example.com.