“Force Majeure” doctrine: What it may mean for creditors or businesses that cannot pay their bills due to Coronavirus / COVID-19.

The doctrine of “Force Majeure” (French for “Superior Force”) can come into play in times of unprecedented crisis, such as the government-imposed shutdowns and social-distancing orders that have come to characterize the Coronavirus / COVID-19 pandemic. [Some may refer to a “Force Majeure” as an “Act of God,” though that term sometimes has other meanings in contractual contexts]. Unless a contract specifically provides otherwise, the rule of Force Majeure generally holds:

Where…

  • The performance of one party (“the promisor”) “is necessarily dependent on the continued existence of a specific thing,” AND
  • that specific thing is destroyed before the promisor’s performance is due, through no fault of the promisor…

… then the promisor’s obligation to perform under the contract is excused.

See e.g. Sale v. State Highway & Pub. Works Comm'n, 242 N.C. 612, 619, 89 S.E.2d 290, 297 (1955)

Translated from legalese into English, this means:

IF:

  1. You have an obligation under a contract, AND
  2. Your performance of that obligation depends upon the continued existence of some circumstance (such as your business being permitted to continue to operate), AND
  3. Some overwhelming factor comes along that:
    1. Has nothing to do with any fault on your part, and
    2. Makes it LITERALLY IMPOSSIBLE (not merely difficult) to carry on business…

…then, you may, in theory, be relieved of obligation to perform under that contract.

Washington’s courts have recognized the rule of Force Majeure before, but only once. In Snipes Mountain Co. v. Benz Bros. Co., and its opinion was written all the way back in 1931, during the Great Depression and Dust Bowl. Snipes Mountain Co. v. Benz Bros. & Co., 162 Wash. 334, 337, 298 P. 714, 715 (1931).

The Snipes Court held:

  • There was a contract for a sale of crops.
  • Because of a draught, the crop failed.
  • Because the crop failed, one of the parties couldn’t meet its obligations under the contract.
  • Since the drought was not the fault of the party that couldn’t perform, its obligation was relieved to the extent the drought made performance impossible (i.e., to the extent performance would have been possible despite the drought, that party still had to perform).

Again, this appears to be the ONLY case on Force Majeure in Washington State history. Technically, it remains binding case law, but it’s doubtful most judges would consider it black-letter (bright-line or definitive) law. Courts tend to uphold those principles that they’ve stated and relied on over and over again, not only once and in a distant past. In such circumstances, it’s usually easy for a judge to decline to apply the rule of the case.

So yes, Force Majeure is a recognized doctrine in Washington, and it’s prevailed before. However, the overwhelming rule under the law is that parties will be held to their performance in written contracts, especially in a commercial or business context. There is good reason for that. In all but the most extraordinary circumstances, the entire economy might collapse if this rule were not dependably enforced.

That being said, the crisis we’re living through is truly extraordinary. We are living through an unprecedented crisis of global scale – the Coronavirus / COVID-19 pandemic. Conservatively assuming a global infection rate of 65% (as Chancellor Angela Merkel of Germany has forecast for her own highly advanced country), if one applies a plausible 1.5% fatality rate across the global population of 7.5 billion people, the world is on track to experience over 73 million deaths within one year. To put that into context, some 100 million people are thought to have died over the entirety of World War 2, which some historians consider to have run from 1931 (Japanese invasion of Manchuria) to 1945.

Now consider that the Coronavirus is highly contagious, that the number of infections are growing exponentially worldwide, and that cases of its attendant disease – COVID 19 - are overwhelming advanced public health systems (New York, Paris, Milan), even in its early stages of this pandemic. In such a context, requiring – or even permitting – most business to remain open could have cataclysmic implications for the number of dead. As public health systems are overwhelmed, the death rate climbs: a 2% fatality rate[1] would mean over 97 million global deaths in one year.

In short, the usual economic order (in which people can justly be expected to pay their bills on time) depends inherently on businesses being allowed to operate under relatively normal conditions. Right now, that’s not merely difficult – it cannot be allowed, and is NOT being allowed.

The world as we’ve known it has changed radically before our eyes in a matter of weeks. The pandemic is still in its early stages; economic disruptions are likely to get much worse before they get better. There may come a point where the bulk of small businesses cannot meet their recurring and/or large pre-pandemic obligations. If that happens, it might be impossible to keep operating under the economic rules of the old world order. Then, the rule of Force Majeure may become a prominent exception to the default rule that people must pay their contractual obligations.

Even now, there can be little question about it: a drought in the 1930s, even during the Dust Bowl, is nothing compared to the circumstances now making it impossible for thousands of Washington businesses to meet their contractual obligations. There’s a good argument that the Snipes rule on Force Majeure, even today, should apply to relieve some business obligations that arose before the pandemic. The longer this crisis continues, the more true that becomes.

If your business has suffered severe economic losses relating to the Coronavirus / COVID-19 crisis, we may be able to help. Call us today at (206) 209-0069.