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Force Majeure in California: Does the COVID-19 Pandemic Qualify? Part 2 – Asserting Force Majeure

Force Majeure in California: Does the COVID-19 Pandemic Qualify?

A Three Part Series

By Stan Gibson and Jessica Newman

Part 2 – Asserting Force Majeure

 

See Part 1 – What Constitutes a Force Majeure

See Part 2 – Asserting Force Majeure

See Part 3 – Practical Guidance

When to Assert Force Majeure

As discussed in Part I, the party claiming inability to perform must be able to show that its performance is impossible or unreasonably difficult due to unforeseeable circumstances beyond its control. Typically, a claim of force majeure is made as an affirmative defense to a claim for breach of contract.

Where a force majeure event is claimed the party faced with the claim has two options. The party may “treat the repudiation as an anticipatory breach and immediately seek damages for breach of contract, thereby terminating the contractual relationship between the parties, or [they] can treat the repudiation as an empty threat, wait until time for performance arrives, and exercise [their] remedies for actual breach if a breach does in fact occur at such time.”[1] Although California law “authorizes the injured party to immediately seek damages” it does “not require the injured party to seek damages or lose the right to treat the repudiation as an anticipatory breach.”[2] If, however, a party “continues to accept the [repudiating party’s] performance, [it] may be deemed to have waived the breach.”[3]

In either instance, the party faced with a claim of impossibility must be able to demonstrate that it was willing and able to continue performing under the contract in order to recover for breach.[4] A party will be unable to recoup losses for a claim of breach of contract if was not able or willing to perform, regardless of the claims made by the contracting party.[5]

In the event a party elects to wait until performance is due to file suit, measures should be taken at the time of the repudiation to mitigate any damages.[6] These measures should include obtaining confirmation that the other party is unequivocally refusing to perform. In addition, the party should take actions that will reduce the impact of the breach and any losses suffered as a result. A party need not go to “extraordinary or unusual lengths to minimize damages[,]” rather the party must “use reasonable care to prevent an unwarranted piling up of damages.”[7]

A Force Majeure Event Will Not Excuse Performance If a Party Failed to Exercise Reasonable Diligence in Ensuring Performance or Preventing the Event

A force majeure clause is not meant to give a party a free pass when events beyond its control result in damage it reasonably could have prevented or avoided. Accordingly, California courts “will not allow a party to rely on an excusing event if [it] could have taken reasonable steps to prevent it.”[8] This is because “[c]auses within a party’s control include causes that could have been prevented by foresight and sufficient expenditure.”[9] Thus, even when a triggering event is beyond a party’s control, a party will not be able to avoid liability for the damages if the party failed to “exercise reasonable diligence in taking steps to ensure performance and to prevent an event from occurring.”[10]

In Mobil Oil v. Southern California Edison Co., Edison asserted that damage caused to Mobil’s oil refinery as a result of a power outage was attributable to “an uncontrollable force/act of God.”[11] Edison served as Mobil’s power supplier for many years.[12] Mobil operated a 24/7 oil refinery that required the least interruptible source of power. While negotiating a new contract Edison represented that it had excess capacity but did not disclose that that it also imported power from other sources and that it was connected to other utilities as part of the “western grid.”[13] Nor did Edison inform Mobil of the risks associated with being connected to the western grid, including that it placed Edison at the “mercy of [its] neighbor’s performance.”[14] In August of 1996, Mobil experienced a 42% voltage dip resulting from a “major system disturbance” that began in Oregon when a high voltage line “flashed over” trees that had not been trimmed below the line, in violation of industry standards.”[15] The disturbance cascaded through the entire western grid and caused Mobil to sustain more than $20 million in lost production and equipment damage.” The Court of Appeal rejected arguments by Edison that the lost production and equipment damage resulted from events beyond its control reasoning that “even if Edison could not prevent certain events, it could [have] take[n] steps to plan for such occurrences.[16] Edison’s failure to take steps “to avoid the spread of the disturbance or minimize its effects on Mobil” amounted to a failure to exercise reasonable diligence and rendered it liable for the damage caused to Mobil.[17]

Thus, a force majeure clause will not excuse a party from failure to exercise reasonable diligence both leading up to and after a potentially triggering event.

Force Majeure Does Not Eliminate Liability for a Party’s Own Actions

Finally, a party may still be liable for damage or injury caused by a triggering event if the party’s actions in some way contributed to or exacerbated the injury and/or damage. In other words, “if it appears that a given loss has happened in any way through the intervention of man, it cannot be held to have been the act of God, but must be regarded as the act of man.”[18]

In London Guarantee, the widow of a janitor brought an action against her husband’s employer after he died when the building he was working in collapsed during an earthquake.[19] His employer argued that it was not responsible for his death because the earthquake constituted a force majeure.[20] The court acknowledged that “[a]s a general principle, the employer is not responsible for damages caused to his workmen by lightning, storms, sunstroke, freezing, earthquake, floods, etc.” as these are considered “as ‘force majeure,’ which human vigilance and industry can neither foresee nor prevent.[21] In this instance, however, expert testimony demonstrated that the concrete walls of the building were poorly constructed and it was the poor construction that resulted in the collapse of the walls.[22] Accordingly, “[w]hile the earthquake, an act of God, may have contributed to the injury . . . it was not the sole cause of such injury, and except for the intervention of some human agency might not have produced any injury whatever.”[23]

Accordingly, before asserting performance is impossible by reason of force majeure, a party should consider whether its own actions have contributed to the delay, difficulty, or impossibility of performance. In the next and final part of the series we will provide practical guidance for addressing force majeure in the COVID-19 Pandemic.

In Part three of this series, we will offer some practical guidance for addressing force majeure and the COVID-19 pandemic.

See Part 1 – What Constitutes a Force Majeure

See Part 2 – Asserting Force Majeure

See Part 3 – Practical Guidance

 

[1] Relentless Air Racing, LLC v. Airborne Turbine Ltd. P’ship, No. 2D CIVIL B237191, 2013 WL 1191832, at *4 (Cal. Ct. App. Mar. 25, 2013) (quoting Romano v. Rockwell Internat. Inc., 14 Cal.4th 479, 489).

[2] Id. at *5.

[3] Id.

[4] See, e.g., Ersa Grae Corp. v. Fluor Corp., 1 Cal. App. 4th 613, 625 (1991) (“Although it is true that an anticipatory breach or repudiation of a contract by one party permits the other party to sue for damages without performing or offering to perform its own obligations . . . this does not mean that damages can be recovered without evidence that, but for defendant’s breach the plaintiff would have had the ability to perform.”).

[5] See e.g., Warner Bros. Pictures, Inc., 197 Cal.App.2d at 351-52 (actor did not have the right to recover damages for breach of contract from the point that “he terminated the contract and was unwilling to perform further.”)

[6] See § 950, Duty To Mitigate., 1 Witkin, Summary of California Law, 11th Contracts (2019) (“where the result of waiting and continuing his or her own performance is to enhance damages, the duty to mitigate them arises and limits plaintiff’s election”) (citing Bomberger v. McKelvy, 35 Cal.2d 607 (1950)).

[7] Guerrieri v. Severini, 51 Cal. 2d 12, 23, (1958) (“[t]he duty to minimize damages does not require an injured person to do what is unreasonable or impracticable”).

[8] Mobil Oil Corp. v. S. California Edison Co., No. B145834, 2003 WL 147770, at *10 (Cal. Ct. App. Jan. 21, 2003).

[9] Id.

[10] Id.

[11] No. B145834, 2003 WL 147770, at *5 (Cal. Ct. App. Jan. 21, 2003).

[12] Id. at *1.

[13] Id. at *3.

[14] Id. at *1-3.

[15] Id. at *4.

[16] Id. at *8.

[17] Id. at *13.

[18] London Guarantee & Accident Co. v. Indus. Accident Comm’n of California, 202 Cal. 239, 246 (1927).

[19] Id. at 241-42.

[20] Id.

[21] Id. at 242.

[22] Id. at 242-43.

[23] Id. at 246.