By Jared Hawk and Lauren Schoeberl

Law360 (October 20, 2020, 5:08 PM EDT) --

Jared Hawk

Lauren Schoeberl

Until mid-March, many businesses did not think much about the boilerplate force majeure clauses buried in their agreements. But now that the COVID-19 pandemic and its attendant series of government orders and regulations have disrupted business relationships across the globe, business leaders are flipping directly to these oft-overlooked clauses to see how they may affect contractual performance obligations.

The fallout from the first wave of the COVID-19 pandemic has already led to an increase in breach of contract claims being filed in Minnesota. Defendants facing such suits will likely contend that their contractual performance should be excused by the unforeseeable occurrence of a global pandemic and will rely on the force majeure clause, if any, and/or a handful of common law defenses.

But Minnesota has never faced a local or global pandemic; unsurprisingly, no Minnesota court has ever construed a force majeure clause or its kindred common law doctrines in the context of a global pandemic, epidemic or other public health scourge. And, pandemic aside, the current body of Minnesota case law addressing the construction and application of force majeure clauses and related common law doctrines is relatively slim.

This body of law will undoubtedly be tested and expanded in the coming months and years as litigants sort out who will bear the brunt of the pandemic. Until then, judges, lawyers and business leaders should understand both the state of the law and the key features of litigants' contracts.

To that end, this article describes the state of Minnesota law on the several contract doctrines that may be asserted by a party whose contractual performance has been impacted by the COVID-19 pandemic.

Pardon my French, but What Is Force Majeure?

A contract's force majeure — meaning "superior force" in French — clause may excuse a party's performance if a specified and unforeseen event occurs.[1] Minnesota courts construe contracts in a manner that best gives effect to the intentions of the parties as set forth in their agreement.[2] Consequently, whether and how a party is relieved of performance due to the occurrence of an unforeseen event depends, of course, on the language of the underlying contract.[3]

There are three important features in the anatomy of a force majeure clause: (1) the event or events that trigger its application; (2) what a party must do to invoke it; and (3) what relief the clause affords when invoked.

The Triggering Event

Ascertaining the triggering event is the starting point in determining whether a force majeure clause can operate to excuse performance due to COVID-19 and its residual effects.

In Minnesota, a force majeure event is one that is (1) unforeseen by the invoking party, yet (2) contemplated by the contract.[4] Common force majeure clauses provide a list of specific triggering events that include occurrences such as war, extreme weather events, strikes, civil disorder and other events beyond the parties' control.

In Minnesota, a party seeking relief under a force majeure clause must prove by a preponderance of the evidence that the clause excuses the performance.[5] Because of this burden of proof, it is imperative to assess the relevant facts and circumstances so that a party can accurately and strategically identify the triggering event under a force majeure clause.

Parties should take care not to potentially limit their rights under a force majeure clause by identifying the COVID-19 virus itself as the triggering event where an event secondary to the pandemic actually was the impediment to performance.

For example, suppose that in April, a government order required the closure of all nonessential businesses, which required a candy factory to shut down and cease production of candy products. As a result of the shutdown, the factory was unable to honor its supply agreements with several candy distributors. In this situation, COVID-19 was not the triggering event that impeded the candy factory's performance; rather, it was the government shutdown order.

Given the widespread disruption caused by the COVID-19 pandemic, businesses may be able to invoke a force majeure clause if the following terms appear in the clause, depending, of course, on the nature of the underlying contract and the parties' obligations:

• Epidemic, pandemic or disease outbreak;
• Quarantines;
• An act of God; 
  
• A public health emergency;
• Government rule or government regulation;
• Disruption of transportation systems or transportation infrastructure;
• Disruption of supply chains or the labor force; and
• National or local state of emergency.

Note, however, that Minnesota courts have not discussed the meaning of an "act of God" in the context of a force majeure clause. Based on its definition in other areas of law, however, "act of God" will likely mean a weather event, such as a bolt of lightning. It is unclear whether a Minnesota court would conclude that a pandemic or other public health emergency is an act of God.

Many force majeure clauses also include, in addition to a list of triggering events, a catchall provision, for e.g., "other similar events beyond the control of the party." Minnesota courts will deduce the scope of such a catchall phrase by considering whether the urged triggering event is similar to those listed.[6]

For example, in a force majeure clause that provides that the parties may terminate the contract in the event of "war, civil unrest, or other similar events beyond the control of the parties," it is unlikely that the COVID-19 pandemic would be considered a triggering event. However, if that clause instead provided "war, civil unrest, public health emergency, or other similar events beyond the control of the parties," a court may determine that COVID-19 is a triggering event given its relation to a public health emergency.

An event likely will not be deemed a triggering event if its occurrence is not the sole cause of a party's performance issues.[7] That said, a party with nonperformance issues that predate the COVID-19 pandemic or whose nonperformance is caused by a confluence of factors — not just the pandemic — likely will not find relief under their force majeure clause in a Minnesota court.

Invoking the Force Majeure Clause

Some contracts require that a party take certain steps in order to invoke force majeure.

Most commonly, parties must provide notice to the other that a triggering event has occurred. Common force majeure language is as follows:


Some clauses set forth an exact time period in which notice must be given; others contain no notice requirement at all. No Minnesota court has addressed whether or to what extent such notice provisions are enforced.[8]

Because Minnesota courts seek to construe contracts according to their plain meaning, they are likely to enforce any notice provisions, or any other provision requiring an invoking party to take steps prior to invoking the force majeure clause, contained in the contract.

Relief Afforded by Force Majeure Clauses

The occurrence of a triggering event is not a party's ticket out of a contract or a permission slip to redraft the contract.[9] Instead, the language of the force majeure clause generally dictates the parties' rights and obligations when a triggering event occurs; some clauses simply relieve parties of performance, others modify the terms of performance, and others permit termination of the agreement.

If they have not done so already, parties to contracts that have been impacted by the COVID-19 pandemic should analyze the force majeure clause, if any, and any other contractual provisions that may impact a force majeure analysis — e.g., dispute resolution procedures; choice of law, jurisdiction or venue; termination; etc. — to determine their rights and obligations.

Other Common Law Defenses Excusing Performance

If a contract lacks a force majeure clause, or its force majeure clause is ambiguous or otherwise unfavorable,[10] the common law defenses of impossibility, impracticability or frustration of purpose may still provide a viable defense to a breach of contract claim where COVID-19 or its residual effects impacted contractual performance.

Impossibility or Impracticability of Performance

In Minnesota, the defense of impossibility or impracticability of performance may relieve a party from contractual performance where performance is impeded and rendered impracticable or impossible by the occurrence of an event, the nonoccurrence of which both parties assumed when making the contract.[11] Mere difficulty of performance is not enough to invoke this doctrine.[12]

This doctrine potentially has broader application than force majeure because the parties need not have contemplated — and committed to writing — the unforeseen event.

In the context of COVID-19, a web of state and local regulations sprung up in response to the spreading virus. Government orders or regulations that inhibit a party's performance likely qualify as events that relieve a party from contractual performance because, generally, parties assume that the law will not intervene when they enter into contracts.

As a simple example, if a wedding venue had contracted with a couple for a 300-person wedding to be held in April, but a subsequent stay-at-home order prohibited gatherings of nonhousehold members, a party could argue that the doctrine of impossibility applies because neither party could perform under the contract.

COVID-19 has created many more nuanced scenarios that impact businesses in nearly every industry, for e.g., whether a youth soccer organization can or should commit to indoor field time in spring 2021 given current restrictions on indoor gatherings that may or may not exist several months in the future.

Frustration of Purpose

Under the similar doctrine of frustration of purpose, a party's performance will be excused if it can establish that its principal purpose in making the contract is frustrated. To identify the purpose in making the contract, a business should identify what was the reason the parties understood that the other(s) entered into the contract.[13] They should then ask, without that reason, whether the contract would make sense or whether the value of the contract is totally or nearly totally destroyed.

For example, in the decades-old case of City of Savage v. Formanek, the plaintiff city planned a development project on land owned by the defendants. The landowners were later required to obtain additional and unexpected permits from a government agency that were prerequisite to developing the land.

The Minnesota Court of Appeals concluded that the defendants were relieved of their duty to pay certain assessments to the plaintiff because their purpose in making the contract with the plaintiff was frustrated by the government agency's unforeseen requirement of additional permits, which both parties testified was a basic assumption in making the contract. Thus, the court observed, both parties' performance was rendered useless.

More recently, in the 2017 case Rembrandt Enterprises Inc. v. Dahmes Stainless Inc.,[14] the U.S. District Court for the Northern District of Iowa, applying Minnesota law, considered the doctrine of frustration of purpose in the context of an epidemic of avian influenza.

The plaintiff, an egg producer, sought to build a large-scale egg processing plant. It entered into an agreement with the defendant for an industrial egg dryer. After doing so, an outbreak of avian influenza decimated the plaintiff's business, and it canceled the construction of the new facility.

The plaintiff sued for declaratory judgment that its performance was excused under the doctrine of frustration of purpose. Specifically, the plaintiff contended that the principal purpose of its agreement with the defendant was to obtain equipment for the egg processing facility, the construction of which was halted due to the avian flu outbreak.

The court denied the defendant's motion for summary judgment, rejecting the argument that the force majeure provision in the parties' agreement precluded the application of the doctrine of frustration of purpose and holding that fact issues precluded summary judgment on the merits of the defense.

In the context of COVID-19, this rarely asserted doctrine may present a viable defense where, for example, a government order does not prohibit performance, but, because of lingering anxieties about the virus, performance would be worthless. For e.g., consider a scenario where a business contracted with an interior designer to design social lounges for employees in its office; however, the business no longer wishes to create the lounges because its employees prefer to work from home for the foreseeable future, and those who work in the office do not wish to socialize because of the virus.

Takeaways

The COVID-19 pandemic has injected uncertainty into nearly every facet of our lives, including unprecedented uncertainty regarding whether parties to a contract will continue to perform their contractual obligations. When facing disruption in an agreement caused by COVID-19 and its fallout, businesses should keep the following in mind:

• When contemplating bringing a claim for breach of contract or defending against such claims, carefully assess which, if any, of the above doctrines or principles apply by analyzing the events that have caused performance to be interrupted and the damage, if any, to the other party to the contract.
  
  
• Minnesota courts will hold parties to the contracts that they entered. For that reason, businesses should determine whether an agreement contains a force majeure clause and, if so, in what circumstances it may be invoked and what notice must be provided to the other party or parties to the agreement.
  
  
• Minnesota law pertaining to force majeure, frustration of purpose, and impossibility or impracticability of performance will undoubtedly be tested as breach of contract claims arising from the pandemic move through the courts. Businesses should stay attuned to changes in the law and how such changes may impact their agreements.
  
  
• To avoid litigation, businesses may also wish to investigate if other parties to the contract will agree to performance alternatives during the pandemic.

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Jared S. Hawk is a partner and Lauren F. Schoeberl is an associate at Saul Ewing Arnstein & Lehr LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Melford Olsen Honey Inc. v. Adee , 452 F.3d 956, 963 (8th Cir. 2006).

[2] E.g., Art Goebel Inc. v. N. Suburban Agencies , 567 N.W.2d 511, 515 (Minn. 1997) (observing that "the cardinal purpose of construing a contract is to give effect to the intention of the parties").

[3] E.g., Melford Olsen Honey, 452 F.3d at 963 (holding that relief under force majeure provision was nonperformance and that plaintiff's unilateral decision to raise product prices due to force majeure was not permissible under contract).

[4] E.g., Melford Olsen Honey, 452 F.3d at 963.

[5] Toll Bros. Inc. v. Sienna Grp. , Civil No. 06-4378 (DSD/JJG), 2009 WL 961379, at *6 (D. Minn. Apr. 7, 2009) (citing Den Mar Constr. Co. v. Am. Ins. Co. , 290 N.W.2d 737, 743 (Minn. 1979), and 17B C.J.S. Contracts §716 (2008)).

[6] E.g., Bremer Bank NA v. Matejcek , 916 N.W.2d 688, 694 (Minn. App. 2018).

[7] See Toll Bros., 2009 WL 961379, at *6 (concluding that government agency's delay in issuing permit was not force majeure event where party seeking to invoke force majeure clause contributed to such delay).

[8] See id. at *3 (D. Minn. Jul. 30, 2008).

[9] See, e.g., Melford Olsen Honey, 452 F.3d at 963.

[10] Rembrandt Enters. Inc. v. Dahmes Stainless Inc. , No C15-4248-LTS, 2017 WL 3929308, at *13–14 (N.D. Iowa Sept. 7, 2017) (applying Minnesota law) (providing that existence of force majeure clause in underlying contract did not bar invocation of defense of frustration of purpose).

[11] J.J. Brooksbank Co. v. Budget Rent-A-Car Corp. , 337 N.W.2d 372, 375 (Minn. 1983) (citing Restatement (Second) of Contracts §261 (1981)); Tresman Steel Indus. Ltd. v. N. Steel Co. , No. C6-90-215, 1990 WL 81407, at *2 n.2 (Minn. App. June 19, 1990) (same).

[12] Powers v. Siats , 244 Minn. 515, 521, 70 N.W.2d 344, 349–50 (1955) (citing 6 Williston on Contracts §1963).

[13] Nat'l Recruiters Inc. v. Toro Co. , 343 N.W.2d 704, 707 (Minn. App. 1984) (citing Restatement (Second) of Contracts §265 (1981)); see also City of Savage v. Formanek , 459 N.W.2d 173, 176 (Minn. App. 1990).

[14] No. C15-4248-LTS, 2017 WL 3929308 (N.D. Iowa, Sept. 7, 2017) (applying Minnesota law).

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