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Law360 (May 13, 2020, 5:20 PM EDT) --
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| Luca Pescatore |
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| Andrew Riccio |
In this article, we briefly survey the New York and Italian perspectives on the contractual defense of force majeure and other, force majeure-type defenses to excuse performance of contractual obligations due to unforeseen events.
The force majeure contractual defense is recognized and enforceable by the courts of both jurisdictions. Even where the contract at issue is silent on force majeure, both jurisdictions also recognize defenses relying on the impossibility of performance similar to force majeure. We review both scenarios in turn, below.
The Contractual Force Majeure Clause
Force majeure is a legal concept that limits the exposure of one party to a commercial relationship if unable to complete performance due to an intervening event. Commercial contracts often include a force majeure clause that defines the circumstances beyond the parties' control that can render contractual performance difficult or impossible.
When a force majeure clause is triggered, the party invoking the clause may suspend, defer or be released from its duties to perform under the contract without liability, depending upon the specific terms of the agreement. Under both New York and Italian law, force majeure is a creature of contract, defined by the terms of the parties' agreement.
New York courts interpret force majeure clauses consistent with their purpose, that is, to limit damages where performance of the contract has been frustrated by circumstances beyond the control of the parties.
As per New York's enforcement of the terms of a contract that is clear and unambiguous, force majeure clauses are strictly enforced. Indeed, New York courts defer to the parties' definition of what constitutes a force majeure event, as well as its application to and effect on the parties' obligations under the contract.
For example, where a force majeure clause lists the types of qualifying events and does not contain a catchall provision (such as: any unforeseeable event outside the control of the party invoking the force majeure clause), New York courts have found that only those events specifically listed can excuse performance.
Where such clauses do contain a catchall provision, New York courts may limit force majeure to events similar to those specifically enumerated.
In order to benefit from a force majeure provision under New York law, the party seeking to avoid its contractual obligation must demonstrate the existence of a force majeure event, and that the party was unable to fulfill its contractual obligation despite reasonable efforts to do so.
It is usually not enough to claim that performance was simply hindered or complicated because of the intervening event. Instead, the invoking party must show that the event was unforeseeable and was the direct cause of the party's inability to perform. The party invoking the clause usually must also show that there is no alternative means for performing under the contract.
Note, however, that increased costs or other difficulties in performing will not be sufficient under New York law because force majeure clauses are intended to provide relief for unforeseen risks that were not contemplated at the time of contracting (beyond the types of qualifying events). The thinking is, had the risk been capable of contemplation at the time of contracting, the parties could have accounted for such risk in the contract.
Similarly, parties contracting under Italian law are free to include a force majeure clause in their contracts that defines the scope and types of qualifying events. In this regard, Italian law does not expressly provide a one-size-fits-all definition of force majeure applicable to all commercial contracts.
While lacking statutory definitions, Italian courts, like those in New York, have consistently held that force majeure generally refers to an unforeseeable, exceptional situation or event beyond the parties' control that prevents them from fulfilling their contractual obligations and neutralizes any efforts aimed at overcoming it.
A common feature of force majeure clauses construed in accordance with Italian law is that they present a rather flexible structure, in terms of both the type of events that may constitute force majeure and the consequences affecting the contract if an event of force majeure actually occurs.
Indeed, on the one hand, force majeure clauses generally enable the invoking party to either suspend performance of its contractual obligations, terminate the contract unilaterally or amend the contract to achieve a more equitable balance between the parties' reciprocal contractual positions.
On the other hand, force majeure clauses differ widely in terms of their scope of application, depending on the type of contract at issue.
While some clauses include very specific terms, expressly listing the categories of events which may excuse performance of contractual obligations (e.g., natural disasters, war, strikes, governmental regulation), others provide for catchall language, suitable to potentially encompass an indefinite range of events.
In any case and in either jurisdiction, the determination of a force majeure defense is fact-intensive. Thus, whether COVID-19 qualifies under a given force majeure clause has to be assessed on a case-by-case basis, and depends on the particular wording of that clause, as well as the intent of the parties at the time of contracting.
An apt force majeure clause might list pandemics or epidemics as qualifying events. In our experience, however, this is a rare inclusion.
Instead, the challenge is to evaluate whether COVID-19 and its effects on the contracting parties falls within one of the listed events or a catchall provision, then to resort to the rules of contractual interpretation (as set forth by the Italian Civil Code and case law in Italy, and by common law in New York) to assess whether COVID-19 was contemplated as an event of force majeure in the parties' understandings.
Defenses Available When There Is No Force Majeure Clause
Under New York law, the doctrine of impossibility of performance provides a common law defense to the performance of a contract where the subject matter of the contract has been destroyed or performance becomes objectively impossible. The impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.
Under New York law, impossibility means impracticability. Like the contractual defense of force majeure, the impossibility defense is only available when the means of performance of the contract have been destroyed by an unforeseen event, an act of God.
Practically, the impossibility defense only applies to executory contracts, i.e., contracts that are not yet fully performed. Note also that New York law does not typically recognize financial difficulty or economic hardship as qualifying as impossibility, even if such hardship leads to insolvency or bankruptcy.
New York law also recognizes the somewhat related doctrine of frustration of purpose. This defense exists when the purpose of the contract is so frustrated that it would make little sense to require the parties to continue to perform.
Whereas the party performing the work, labor or service typically asserts impossibility of performance, the party paying for such work, labor or service typically asserts the defense of frustration of purpose.
Both doctrines turn on factors such as foreseeability, fault of the nonperforming party in creating the event or failing to prevent it, the severity of harm caused and the fair allocation of risk among the parties
Under Italian law, if the force majeure clause does not cover an event such as the COVID-19 pandemic, or the contract does not include a force majeure clause, the parties may invoke the so-called supervening impossibility doctrine.
This doctrine serves to protect the invoking party from the effects of a supervening force majeure-type event that hinders that party's ability to fulfil its obligation under the contract (section 261 of the Restatement (Second) of Contracts describes the similarly named U.S. doctrine of supervening impracticability).
As a general principle of Italian contract law, the party who fails to perform its contractual obligations is liable to the other party for the damages suffered. However, this general principle may be excused if the nonperforming party proves that the breach was caused by an impossibility to perform not attributable to the debtor.
In other words, the debtor may be relieved of liability for its breach of contract if it proves that the performance of the obligation has become impossible and the supervening impossibility is due to reasons not attributable to the debtor itself. The effects that the supervening impossibility may have on the contract vary depending on whether such impossibility is permanent or temporary.
If permanent, the contract would be deemed terminated and the parties released from their obligations, entitled to recover only as to the performance already made. If temporary, the debtor would not be liable for the delay in performance and the contract suspended for so long as the performance remains impossible (provided that other specific conditions are met).
Italian courts have found that a supervening impossibility requirement was satisfied in cases of earthquakes making buildings uninhabitable, and of supervening legislation or governmental regulation making the goods covered by the contract no longer tradable (i.e., the so-called factum principis).
Further, recent rulings have held that the impossibility to perform can be invoked not only if the performance of the debtor's obligations has become impossible, but also if the use of the counterparty's performance has become impossible (when this impossibility is not attributable to the creditor and its interest in receiving the performance has ceased).
As such, a party may be able to invoke the same event to be excused from accepting performance where the goods or services can no longer be used.
Whether COVID-19 satisfies the impossibility of performance standards under either New York or Italian law, respectively, is a complex issue that cannot be assessed on a purely theoretical level. As a matter of fact, the emergency measures adopted globally to stem the spread of the virus, in particular in New York and in Italy, are having a substantial impact on businesses.
As noted above, whether such measures are deemed force majeure events will depend on a particular contract's definition of such an event.
Where the contract is silent on the issue, in the context of a pandemic, the governmental measures — forced closure of businesses, travel restrictions, etc. — may qualify under the New York defense of impossibility of performance if such measures destroyed the means of performance of the contract.
Prior to the pandemic, New York and Italian courts have found legal impediments, rather than acts of god, qualify for such a defense. Thus, governmental regulations arising out of the efforts to stem the spread of COVID-19 could very well support an impossibility defense.
As noted previously, however, the impossibility defense is fact intensive. Courts may be guided by market indications when deciding whether the event in fact made performance impossible or impracticable.
For example, if a party has become unable to perform its contractual obligations due to the nonperformance of its suppliers or third-party providers, is it dispositive that a similar party in the same industry has been able to obtain performance from other suppliers or third-party providers?
New York courts, for example, have found that the defense of impossibility was not available where the invoking party had alternative means of performing under the agreement, i.e., performance was not objectively impossible. Italian courts similarly require that the impossibility to perform invoked by the parties be objective. Thus, the debtor's supervening impossibility claim would likely fail if the debtor could otherwise fulfill its obligations under the contract.
Again, whether a party can rely on a force majeure clause or impossibility defense, under either Italian or New York law, will require careful scrutiny of the contract and underlying situation.
We stress the fact-intensive nature of any analysis as variations among industries and the particular circumstances of each case will no doubt lead to many gray areas and no clear answer.
Luca Pescatore is a partner and L. Andrew S. Riccio is an associate at Baker McKenzie.
Andrea Caterino, a legal trainee at Baker McKenzie's Rome office, also contributed to this article.
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.
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