8:22am PT by Schuyler Moore
Responding to COVID-19: How to Limit Damages After a Breached Contract (Guest Column)
You have just decided, or have been forced, to breach a contract due to the spread of COVID-19. You are an actor who has decided not to show up on set, or you are a company that will not (or cannot) complete a film, release a film, hold an event or pay for something that is now worthless to you due to one of these events. Now what?
One option is to bite the bullet and be prepared to pay for all damages that flow from your breach. Ouch. A better option is to rely on various defenses available to you by law. If your contract does not have a force majeure clause (discussed below), you are going to have to rely on one of two defenses that are implied by law (“the Default Rules”).
— The first Default Rule is the doctrine of “impracticability.” Under it, most courts (including those in California) will excuse a breach of contract if an unforeseeable event makes performance impracticable by causing a very high level of difficulty or extra expense for the breaching party if it were to perform under the contract; the event is beyond the control of the breaching party; and the breaching party did not expressly assume the risk of the event occurring. Given that the occurrence and rapid spread of COVID-19 was unforeseeable at the beginning of this year, a breach may be excused if the contract was entered into before then and if performance becomes impracticable, which will depend on the facts of each case. For example, an actor refusing to perform on a studio stage in L.A. due to fear of COVID-19 might not be excused, but refusing to perform in Italy right now might be.
On the other hand, if a production company breaches a contract because it is unable to complete and deliver a film due to actors not showing up on a studio stage in L.A. over fear of the virus, the production company’s breach should be excused due to the unforeseeable event of the actors not showing up. Similarly, a studio should be excused if it breaches a release commitment (e.g., MGM’s delay of release of No Time to Die) due to fear of low attendance or of the virus being spread at theaters.
— The second Default Rule is the doctrine of “frustration of purpose.” It is similar to the doctrine of impracticability except that the unforeseeable event must destroy the purpose of the contract to the breaching party and the other party must know of the purpose of the contract to the breaching party at the time of entering into the contract. For example, if a studio has booked substantial advertising in advance for an upcoming film release and that release is delayed due to COVID-19, the studio should have a valid defense to payment (as long as the studio did not expressly assume the risk of delay and the advertising was cancelled) because both parties knew that the purpose of the advertising was to support release of the film. The counterargument would be that delay of release of the film is within the studio’s control, but there would be no point in keeping the release date if few people would show up, so delay is really due to COVID-19 and is beyond the control of the studio.
If a contract does have a force majeure clause, the most important consequence is that the courts have held that it overrides the Default Rules discussed above, so the Default Rules can no longer be relied on to excuse performance. A force majeure clause is always interpreted to only apply to events beyond the parties’ control, whether or not that is expressly stated. Beyond those rules of interpretation, other consequences depend on the precise wording of the clause.
— Under the Default Rules, performance is excused entirely. Under most force majeure clauses, performance is delayed up to a stated time during force majeure events but is not excused. For example, completion bonds typically permit force majeure delays for up to 90 days.
— If the clause lists specific events of force majeure (e.g. “strike, lockout, riots”) those events will excuse or delay performance, whether or not foreseeable. In addition, a list of specific events is often interpreted by courts to require all force majeure events to be similar to those on the list, precluding truly unforeseeable events from inclusion. For example, a force majeure clause listing a number of film industry specific issues may be interpreted to not excuse a breach due to COVID-19.
— If the clause either does not list any specific events or lists specific events and also has a general reference to “force majeure events,” “acts of God” or “other similar events,” then any other claimed event of force majeure must be unforeseeable, which should include COVID-19.
— Most force majeure clauses do not specify the degree of difficulty required to excuse performance and effectively require impossibility of performance, e.g., excusing or delaying performance “if performance is prevented by an event of force majeure.” Such wording could be interpreted to require performance even if it created a high risk of a person getting COVID-19. Ideally, the wording specifies the degree of difficulty required to excuse or delay performance, such as “if performance is made materially more difficult, expensive or dangerous by an event of force majeure.”
A final alternative is for either or both of the parties to seek reimbursement for damages from a completion guarantor (in the case of abandoned or delayed productions) or insurance. Completion guarantors are surely going to take it on the chin for abandoned productions — and everyone suffering damages related to COVID-19 will be scrambling to read the fine print in their insurance policies, particularly if they have business interruption, travel, force majeure or umbrella insurance.
The only certainty is the one thing that will spread as fast as COVID-19 is litigation, including claims of impracticability and frustration of purpose under the Default Rules, claims relying on contractual force majeure provisions and claims under insurance policies.
Schuyler Moore is a partner at Greenberg Glusker who specializes in corporate entertainment law.