Between stockpiling toilet paper and filling the liquor cabinet, a client recently asked me whether parties to aircraft purchase agreements or other contracts will be able to use COVID-19 (the “coronavirus) as a “force majeure” event to excuse performance. Of course, my lawyerly answer is, “it depends.”
What Is A Force Majeure Clause?
A “force-majeure clause” is a term in an agreement allocating the risk if performance becomes impossible or impracticable as a result of an event or effect that the parties could not control or anticipate. The clause allows a party to suspend or terminate performance when a force majeure event makes performance impractical or impossible.
Oftentimes the parties will protect themselves by specifying a variety of force majeure events that would excuse performance. For example, a typical clause may excuse performance in the event of
“delays due to causes beyond a party’s reasonable control, acts of God, acts of government or military authority, acts of terrorism, mechanical difficulty (except as otherwise provided herein), war, civil commotion, strikes or labor disputes, weather conditions, delays in transportation or shortages, or inability due to causes beyond its reasonable control to obtain necessary labor, materials, utilities components or manufacturing facilities.”
When a force majeure clause includes specific events (like the one above), it is usually unnecessary that the event be unforeseeable. However, when an alleged force majeure event is not specifically listed, a general “catch-all” provision (e.g. beyond a party’s reasonable control) may be included. In that case, it is usually necessary to show the event was unforeseeable when the parties entered into their agreement.
How Do Courts View Force Majeure Clauses?
In Texas, as in many states, whether something is a force majeure event is a factual issue determined on a case-by-case basis. The party whose performance is to be excused has the burden of proof. The party must prove both the occurrence of a force majeure event and that the event has prevented the party from performing.
And it isn’t necessary for that party to prove that it acted with due diligence. But a party will generally, and sometimes specifically, have a duty of good faith requiring the party to make a bona fide effort to resolve the restraint that is preventing the party from performing.
Once a court has determined that a force majeure event has occurred, the court must then analyze whether the force majeure event excuses a party’s performance. To do that, the court will generally look at:
- The language in the clause, including the events the parties have agreed are force majeure events;
- Whether the event was foreseeable if the clause does not contain specific events, or if the alleged force majeure event falls within the “catch-all” language of the clause; and
- Whether alleged force majeure event actually prevented performance or made performance impractical. The occurrence of a force majeure event alone does not excuse performance. It must actually cause a party to be unable to perform.
Is The Coronavirus A Force Majeure Event?
Although the coronavirus is certainly making headlines and impacting everyone’s lives, the virus itself may not actually be a force majeure event. However, actions taken or experienced as a result of the coronavirus or the government’s attempts to deal with the virus may qualify. As a result, a party to an aircraft purchase agreement may be able to argue that its performance is excused due to the coronavirus.
For example, if the parties agreed that an aircraft was to be relocated for delivery, a national travel ban intended to curb the spread of the virus would prevent this flight. And since the ban was beyond the control of the parties, it would likely be considered a force majeure event.
However, depending upon the language in the agreement, this event may only delay performance rather than terminating a party’s obligation to perform. It is possible, though, that a temporary legal ban on performance could completely excuse performance depending upon the circumstances.
A similar situation could arise when a pre-purchase inspection of an aircraft discloses a discrepancy requiring replacement of a part or component. If the part or component is unavailable due to disruptions in the supply chain directly resulting from the coronavirus, that could be considered a force majeure event. Lack of qualified personnel to repair the aircraft due to illness or self-isolation as a result of the coronavirus could, depending upon the circumstances, also qualify as a force majeure event.
On the other hand, an economic downturn in the aircraft sale market would likely not be considered an unforeseeable occurrence that would justify application of the force majeure clause, even if the market downturn resulted from the coronavirus. A force majeure provision will not excuse performance simply because performance has become more economically burdensome than a party anticipated or if the financial terms of the transaction are not consistent with the changed market.
We are certainly living in interesting times. The coronavirus is impacting all of us in our daily lives. And the full extent of that impact remains to be seen.
The virus may also directly impact parties buying and selling aircraft. Its effect on these transactions will depend upon the facts and circumstances of each transaction and the applicable state law. Aircraft buyers and sellers affected by the coronavirus will need to carefully analyze their situations to determine their rights and obligations.