Due to government-issued shutdowns, quarantines, and employee wellness concerns, industries worldwide are facing severe declines in productivity. While the world waits for a COVID-19 vaccine, as cannabis and hemp industry operators, you might have a lot of questions about whether or not your business is obligated to perform under its contracts in this time of crisis.
Something called a “force majeure clause” presents some parties with a way to avoid burdensome contractual obligations during difficult times. This clause allows you to challenge your legal agreement’s bounds due to extraordinary circumstances beyond your control. In this article, we will discuss what a force majeure clause is and how it applies to cannabis and hemp businesses in California. Keep reading to learn how you can assess whether your contracts and your cannabis or hemp operations contain this layer of protection from pandemic-related challenges.
What Are Force Majeure Clauses?
A force majeure clause is a provision in a contract that excuses, in cases of certain extenuating circumstances, one or both parties’ obligation to meet their respective performance obligations. Force majeure provisions are typically worded to excuse performance in extreme situations outside the control of the signatory parties.
A standard force majeure clause includes events that include the following:
- Acts of God
- Severe weather
- Terrorist Attacks
- Epidemics and Pandemics
- Government intervention
- Changes in laws and regulations
- Strikes and other labor disputes
- Workplace accidents
Additionally, it is worth noting that economic hardship does not typically constitute a qualifying event under a standard force majeure clause. If financial hardship is one of your concerns in this pandemic, you should consult with your lawyer to evaluate ways to expand relief under your pre-existing contractual force majeure clauses.
As force majeure events are usually interpreted narrowly, it is also worth mentioning that such provisions cannot be easily invoked, and much depends on the specific language of the clause. There are also significant fact-finding inquiries, so this is certainly not a get out of jail free card. Since the specific language of the force majeure clause determines the outcome, it is essential to use language that is specific to the cannabis or hemp industries as well as to your own unique business needs.
Invoking Existing Force Majeure Provisions Due to the COVID-19 Pandemic
In invoking a force majeure provision with regard to the current COVID-19 pandemic, the primary determination to be made is whether the outbreak and subsequent statewide shelter-in-place order issued by the Governor are covered events in the language used in the contract. If the provision in your agreement includes explicitly “epidemics,” “pandemics,” “quarantines,” or similar circumstances as a force majeure event, then you will likely succeed in invoking force majeure.
However, even if “epidemics,” “pandemics,” or similar circumstances are not expressly mentioned, the current situation might still encompass a force majeure event if it identifies “acts by government entities” as a precluding event. Additionally, strong arguments exist that the pandemic falls within the scope of the “act of god” verbiage present in many force majeure clauses.
Considerations for Invoking Force Majeure in California
The principle underlying the force majeure doctrine is based on Section 3526 of the California Civil Code, which states that “no man is responsible for that which no man can control.”
Though courts in some states might interpret the term “Acts of God,” narrowly to only include unforeseen and unpreventable natural phenomena, such as flooding and wildfires, it is worth noting that California interprets the provisions a bit “less narrowly” than other states. Pac. Vegetable Oil Corp. v. C.S.T., Ltd., 29 Cal.2d 238 (Cal. 1946). Instead, in California, the courts consider whether there existed an insurmountable issue unforeseen at the time of contracting that was not controllable by the due diligence and proactivity of the party in question.
The grey area that exists in making such determinations can help cannabis and hemp companies based in California secure more positive outcomes through invoking force majeure, as this pandemic and the resulting local and county government regulations were undoubtedly beyond control. However, before you set your mind on citing force majeure to justify non-performance of a contract, or possibly relying on such contract language as a defense in a lawsuit , it is crucial to discuss the specific details of your situation with a lawyer.
Cannabis & Hemp Industry-Specific Considerations
The force majeure suit of Third Wave Farms, LLC v. Pure Valley Solutions, LLC was one of the first to arise in the United States during the COVID-19 pandemic. However, as in this case, if your business has already been experiencing financial issues – it can be hard to prove that the COVID-19 pandemic was the actual reason that your company wasn’t able to meet its contractual obligations .
Now that the pandemic has already hit, and second and third waves are quite likely, it has become paramount to ensure your new contracts include a force majeure clause with pandemic-specific language. Including such a provision will protect your business interests in the case of a repeat lockdown or if there is an outbreak in your production line.
Revising Existing Contracts To Include Force Majeure Provisions
Now that you know more about force majeure provisions in cannabis and hemp contracts, you might be a bit worried if some of your contracts do not include a force majeure clause already.
Typically, parties can mutually agree to amend a contract. This means that if both parties agree to add a force majeure clause to protect their respective interests, then this provision can be added to a pre-existing contract. This will be particularly helpful and much more likely if both parties are at risk of losing productivity due to issues related to the COVID-19 pandemic.
If you have a force majeure clause in your contract(s) but you are worried the language is too vague to cover any issues related to the pandemic, this is also something that can be worked on. If you want to shore up this language, it is best to have your lawyer work on a potential amendment to the contract that makes you more resistant to pandemic-related issues.
Alternatives If Your Contract Does Not Have A Force Majeure Clause
If your existing contract lacks a force majeure clause and the other party to the agreement refuses to add one, there is still hope.
Impossibility or Impracticability
Under Section 1441 of the California Civil Code, impossibility or impracticability can excuse a party’s non-performance – which is likely given the pandemic. The California Civil Code provides:
A condition in a contract, the fulfillment of which is impossible or unlawful, within the meaning of the Article on the Object of Contracts, or which is repugnant to the nature of the interest created by the contract, is void.Section 1441, California Civil Code
Additionally, in Section 1511 of the California Civil Code, the California legislature details when the performance of a contractual obligation is excused:
1511. The want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate:Section 1511, California Civil Code (Emphasis added)
1. When such performance or offer is prevented or delayed by the act of the creditor, or by the operation of law, even though there may have been a stipulation that this shall not be an excuse; however, the parties may expressly require in a contract that the party relying on the provisions of this paragraph give written notice to the other party or parties, within a reasonable time after the occurrence of the event excusing performance, of an intention to claim an extension of time or of an intention to bring suit or of any other similar or related intent, provided the requirement of such notice is reasonable and just;
2. When it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary; or,
The critical thing to note here is that to successfully excuse non-performance, you must establish an actual impossibility. This is not an easy task. Businesses must take proactive measures to prevent the inability to meet their contractual requirements This includes implementing measures to prevent the spread of COVID-19 through your workforce, as well as making substantial efforts to source new suppliers in case of a breakdown in your supply chain. A lack of funds or another economic issue, from reduced business due to the pandemic, is not likely to stand up as an argument in court.
If impossibility or impracticability arises due to temporary conditions, like the pandemic, it is also possible that obligations defined in any agreement might be suspended for the duration in which the said conditions exist.
If your company is struggling to meet its obligations and its contracts do not contain force majeure clauses , it is important to talk to your lawyers about whether impossibility or impracticability justify avoiding contractual requirements.
Frustration of Purpose
Another common law defense that could excuse contractual obligations because of the COVID-19 pandemic is frustration of purpose. After a contract is made, frustration of purpose may be established, if the purpose of a party is substantially frustrated without fault by that party, and the event causing the frustration was not predictable or in the scope of the contract. Using this argument, the duties of that contract can be discharged unless the contract includes language that explicitly deems otherwise. In other words, frustration of purpose may be established if the original purpose of the contract is rendered meaningless or without any value to at least one party, despite the party still being able to meet the obligations set forth in the contracts.
Delay in delivery or nondelivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.Section 2615, California Commercial Code
The hirer of a thing may terminate the hiring before the end of the term agreed upon:Section 1932, California Civil Code (emphasis added)
1. When the letter does not, within a reasonable time after request, fulfill his obligations, if any, as to placing and securing the hirer in the quiet possession of the thing hired, or putting it into good condition, or repairing; or,
2. When the greater part of the thing hired, or that part which was and which the letter had at the time of the hiring reason to believe was the material inducement to the hirer to enter into the contract, perishes from any other cause than the want of ordinary care of the hirer.
It must be noted that in order to excuse contractual obligations by establishing frustration of purpose, the “frustration” must be severe or substantial. Reduced profitability or even a financial loss for the affected party are not valid reasons to demonstrate frustration of purpose.
If you are planning on signing new contracts during this time, to safeguard your business in the case of a second or third wave, it is essential to ensure that a force majeure provision is included and that its language mentions pandemics explicitly.
Remember, the force majeure provision in your contract might not need to mention “pandemics” in order for the COVID-19 pandemic to justify pausing performance or abandoning the contract altogether. There also might be additional defenses, besides a pre-existing force majeure clause, that can protect you from liability for breaking a contract.
If you have any questions about force majeure clauses as they pertain to cannabis or hemp industry operations in California, including how you can amend pre-existing agreements, please contact the corporate transactional lawyers at Rogoway Law Group.